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May 31, 1991
The bond market is on hold, waiting for May employment data due Friday, June 7.
The 1st Quarter GNP was revised to a slightly less sick 2.6% decline from negative 2.8%.
Meanwhile, the third consecutive rise in Leading Economic Indicators (plus .6% in April) tends to confirm an end to the recession in the 2nd Quarter. The strength of the recovery is another question (see below).
From early 1987 until last August, the big economic debate was whether the Fed could contain inflation without a bad recession. The endlessly used metaphor for success was "soft landing."
Pundits everywhere lived in dictionaries of aviation terms to describe various outcomes: crash, ground loop, flaps up (down), touchandgo, DC10, blown tires, wind shear, shootdown, fog, empty tower, birdintheintake, nosedive, gear up on and on.
Anybody who restarts this rhetorical rhubarb should be be put in stocks for a week near a vegetable stand.
Somebody has already started. A fellow in New York speculated about our pending economic recovery, wondering what the "take off" would be like. So you can't blame me for saying we are going to have a hard time clearing the trees at the end of the runway, and it's too late to abort.
Translation: the recovery may be quite weak.
A weak recovery will allow mortgage rates to stay about where they are, whereas an ordinary recovery would drive mortgage rates over 10% quickly.
Though ordinary recoveries usually look weak at this stage, there is a good reason to believe that this one will stay weak. The reason? Interest rates (particularly long term ones) are not as low as they "should" be at this stage.
We haven't been in a recession since 1982. 1986 was the last shaky moment for the economy, and the last low inflation rates until now. But then, mortgage rates fell to 8.50% for a few months.
Now, mortgage rates are stuck at 9.509.75%. Why no lower? The best guess is our old villain, the budget deficit. The Treasury is elbowing all other borrowers out of the way, and the Fed dares not be easier. The only way to get the Treasury on the temperance wagon is to raise taxes. Neither deficit nor taxes will help this recovery at all.
This shaky biplane will make it airborne, but there may a tree branch stuck in the landing gear. And the first tomato is headed my way.
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