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April 6, 1990
This morning's employment data show surprise weakness in the economy. NonFarm Payroll gained only 26,000 jobs in March, while forecasts expected 150180,000. In the bizarre math of the labor department (where you aren't unemployed if you got too discouraged to look for a job) unemployment fell by .1% to 5.2%.
The Purchasing Managers' Index showed a marginal gain, up .5% to 48.8%, hovering just above recession level. February Leading Indicators plunged 1%, the biggest decline in nine months, but a bit overstated.
This column generally avoids efforts to predict the future. However, every once in a while we get one right, become overconfident, and roll the bones again.
At New Year, after a long decline, we said the risk was large for mortgage rates to head toward 10.5%; we were among the earliest to make the right call.
Now it is time to reverse the prediction: the odds in favor of a recession and lower rates are better now than at any time since last summer. Don't get carried away floating every deal, but don't be in a hurry to pay big fees for long term rate protection on new construction, either.
The evidence for a decline goes like this (it will take a couple of months to see if the interpretation is worthy of Holmes, or Clouseau).
At the Fed's February meeting, a majority backed unchanged rates, but a standby readiness to tighten. The minority wanted immediate tightening. Though the Fed has taken care to wipe its fingerprints, bank reserve conditions are clearly tighter, and money supply measures already show slower growth.
Chairman Greenspan has preferred to back away from recession in favor of the White House ever since his appointment. The price has been a steady increase in inflation and a stagnant economy. A group of Fed Governors is dissatisfied with the Chairman's recession flinch, and wants a tougher inflation stance.
A tougher stance is what we have, and will hold until a recession appears sometime as early as summer.
Meanwhile, inflation help is on the way from other sources which will help the bond market no matter what the Fed does. The strong dollar will reduce inflation pressure as import prices come down, and will slow domestic export industries. There is a good argument that oil prices are due for a sizeable drop due to OPEC overproduction a help for inflation, but hurt for domestic energy industries.
Retail Sales on Thursday and Wholesale Prices on Friday will be the next signals on the rate road.
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