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June 10, 1994
Mortgage markets held their gains this week, and rates are as low as any time since the April Fool's Day Massacre.
Today's wholesale price news ("producer prices") was pretty good, though a kind of double-reverse. The overall index fell .1% in May, but the "core" rate, excluding food and energy, rose .4%. Half of the jump in the core rate was caused by a big rise in tobacco prices, hardly central to the economy, and not what you'd call a growth industry.
The report that got the attention of the markets this week was a mysterious one: the change in consumer credit outstanding in April. In a mass attack of Inspector Clouseau-itis, those parties paying attention were at first alarmed, then puzzled, then pleased, but even the pleasure had an overtone of suspicion.
Consumer credit soared $8.9 billion in April. In a world dominated by billions followed by lots of zeros, $8.9 billion may not seem like much. However, it was the largest single surge of consumer borrowing since 1985, and followed a gain nearly as big in March.
Since a borrowing binge usually signals rapid economic growth and inflation, the first flash of this news would normally have nervous traders accidentally removing thumbs with their cigar cutters.
Mercifully, the consumer credit data were released just after the markets closed on Tuesday, and investors had an evening to think things over. The next morning, markets improved, and mortgage rates hit a 60-day low.
Overnight it occurred to the various Clouseaux that there was no sign that consumers had consumed anything unusual in March and April. Auto sales had flattened out, as had retail sales in general. If no special spending happened, where did the money go?
Nervous, trench-coated pacing. What could have happened in March and April to cause borrowing, but no sales? Is there a household financial event specific to those months which was unusual this year? The fingerprints on the dagger stuck in the body gave the crucial clue: families with incomes above $75,000 were the primary debt-accumulators.
Ah-HA! I have eet! A rit of fealous jage!
Certainly some rage, a fit, and even a little jealousy. In March and April each year, people pay their taxes. If their taxes went up in a complicated process decided over a year ago, many people might be surprised, and have to borrow. Since the tax increase was supposed to hit people making over $75,000 (who retain some envy of lower-bracketers), they did the most borrowing.
Voila. One hopes, anyway. If the tax rise hit hard enough to make people borrow, it hit hard enough to slow the economy. Therefore, reduced inflation fears, and happy bonds.
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