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May 2, 1997
Irrational exuberance, eh?
This week set a new standard for the meaning of Mr. Greenspan's gift to financial terminology.
Upon the release of every economic report and every news item, the bond market took the most optimistic possible view, and also took the Dow back over 7,000. 30-year T-bonds fell from 7.12% last week to 6.91% at the best of this morning, and mortgages are down from 8.50% territory to 8.25% on a "zero and zero" basis.
The show started Tuesday with release of the "employment cost index," an excellent measure of wage-driven inflation pressure. The 1st quarter index showed only a .6% gain, excellent news versus the .9% expected; and was accompanied by a 3% drop in March orders for durable goods.
(Ignored: news that 1st quarter gross domestic product had soared 5.6%, the strongest quarterly rise in a decade, and roughly double the rate for inflation danger.)
Then, budget exuberance took over. The original forecast for the 1997 budget deficit was $127 billion, and only last week was revised to $90 billion -- entirely because of increased tax revenue; certainly not any restraint on spending.
On Wednesday, even better news: The Treasury said that April was such a fat tax month that the Treasury is holding $80 billion in cash, and that it plans to pay off $65 billion of Treasury debt this quarter. Further, the 1997 deficit may settle under $70 billion -- the lowest percentage of GDP since 1973. This balance-by-itself budget may get us a capital gains tax cut after all. No thanks to Congress, of course; we did this deal all by ourselves.
(Ignored: 1st quarter consumer spending raced ahead at a 6.4% annual clip, which on top of 3.4% at the end of 1996 was the strongest two-quarter growth in 14 years.)
In today's monthly payroll follies, non-farm payrolls rose only 142,000 jobs in March -- half the forecast.
(Ignored: while payroll reports gather enormous attention from the markets, they are prone to equally enormous error. The net increase of 142,000 jobs was held down by a drop in construction jobs, supposedly down 69,000 in March. Really? While new home sales, housing starts, and construction spending are all setting records? Oh-by-the-way: unemployment fell to 4.9%. We entered the danger zone when passing 5.5%.)
I promise that there is nobody at the Fed ignoring the too-strong part of the news. A shrinking deficit is nice, but not remotely enough to hold off another tightening move on May 20. In fact, a little more of this exuberance, and the Fed will start to hit with .50% rises rather than mere point-25%'ers.
Cool it out there. Don't look so cheerful. The Man's watchin'.
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