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June 20, 1997
Bond yields and mortgage rates fell again this week, to 6.65% and near 7.75% (depending on fees), respectively. The improvement came from an apparently expanding consensus that the economy has slowed a great deal in the April-June quarter.
It's an odd consensus. Economists, traders, and partners in securities firms have been quoted in growing numbers for weeks, saying 2nd quarter growth will fall to the 1-2% annual range, down from the screaming 5.6% pace in the 1st quarter. If the economy slows, inflation is no threat, and the Fed won't tighten.
There is nothing odd in that forecast except for the footnotes offered by so many forecasters. One fellow recited the forecast, and then said he didn't especially believe it. Several said the 2nd quarter might slow down, but the economy would immediately rebound, and the Fed would have to move after all.
This tone among forecasters is typical of a market which has gotten a great deal better for no apparent reason, and forecasters then scramble to find a compelling prediction for the past.
While all eyes are on the G-8 meetings here in Colorado, they would be better advised to watch the Fed 12. Not a new fighter jet, nor a group of prisoners, or jurors, the twelve worth watching are the regional Federal Reserve Banks and the survey they released this week.
The geographic distribution of these regional banks is a relic of the Fed's creation at the turn of the century: 10 of the 12 are east of the Missouri river. However, they have an excellent sense of business activity in their respective regions.
Boston: "increased hiring". New York: "rising loan demand, and sharply rising real estate prices". Philadelphia: "increased shipments and orders". Richmond: "tighter labor markets". Atlanta: "labor shortages". Cleveland: "labor shortages". Chicago: "labor markets continued to tighten". St. Louis: "tight labor markets". Kansas City: "labor was tight". Dallas: "labor markets were tighter". San Francisco: "widespread shortages of skilled labor".
The day this survey -- the "beige book" -- was released, the Wall Street Journal headline said: "Growth Easing". New York Times: "Pockets of Weakness".
Gee, guys; read much, do you? There are always "pockets of weakness". Did you notice any other pattern in the report? Or are you focused on trying to invent a rational basis for irrational exuberance?
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