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July 27, 1990
Mortgage discounts have improved this morning on news of a weakening economy. The drop in rates is limited by data showing no improvement in inflation.
The AprilJune Gross National Product (GNP) estimate was released this morning, and showed a growth rate of 1.2%, fractionally slower than expected. The First Quarter results were revised from 1.9% growth down to 1.7%. In a related report, the GNP Deflator showed inflation holding at 4.4%.
Contrary to widespread expectations of a rebound in manufacturing, Durable Goods Orders fell 3.2% in June. A recession is defined as two or more consecutive quarters of negative GNP growth. We are not there, but we are close.
Nobody knows for sure what causes recessions. The Fed is an immediate cause, but usually in reaction to inflation. Many economists believe in an inevitable "business cycle" of expansion and contraction, boom and bust. Others think the cycle has been suspended indefinitely.
Since nobody knows what causes recessions, you shouldn't be surprised that nobody is good at predicting them, either.
Though the "money supply" has several inexact definitions, its growth and contraction has been the best available general indication of future economic growth.
As noted here this spring, the Msoup has shown hardly any growth in 1990. The most favored M, M2, shows 12month growth at 5.4%, sixmonth at 3.0%, and three month at .5%. Despite recent easing, this money "growth" may not support any GNP growth at all in the second half of 1990.
Nobody really wants a recession right now, but the Fed's inflation war is in sharp conflict with the budget deficit. The tension in this conflict is so high that a small mistake, a data error, a surprise report, a bungled auction, a Congressional tantrum, election year follies, a lurch in Tokyo, next Friday's employment dataŠ. Interest rates have been largely unchanged since early May. In a period of high tension, stability in rates is an illusion; there is no underlying stability at all. After three frozen months we are due for a break either way, and perhaps quite large.
The Treasury will borrow $46 billion in new cash in the next 30 days, and roll over another $144 billion. That's a crowded, high speed road with no shoulders. An accident would be hard to handle.
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