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July 31, 1998
A news surprise has intercepted a nice little bond rally, and mortgages are still 7.00-7.125%.
The global-recession-rates-are-going-lower crew had convinced itself that the U.S. economy stopped growing altogether in the April-June quarter. In the last couple of weeks, trendy deflationists predicted outright economic shrinkage in that second quarter.
Didn't happen. The Commerce Department reported 1.4% growth in GDP for the 2ndQ. That's down four points from the 1stQ, but one full point was chopped off by the GM strike, and the rest by drawing down inventories which had been overbuilt in the 1stQ.
2ndQ consumer spending continued to grow at the same blistering 8%(!) pace as in the 1stQ.
In other news, orders for durable goods slid .2%, hit by Asia; but sales of new homes screamed off to another record, up 3.8%.
Before the GDP report crushed it, the bond rally had started in Asia (again) on more gloomy news from the Land of the Setting Sun.
Mr. Obuchi, the new prime minister, makes Bob Dole look like an electrifying leader. On arrival he is about as popular in Japan as Herbert Hoover was upon departure.
The yen this morning is down to 144.5/buck (remember: the more yen/buck, the weaker the yen; up is down), the same sad spot at which Secretary Rubin intervened last month to prop it up (down). Nobody expects Mr. Rubin to intervene again, and the yen is on its own. Traders casually refer to an end-of-year yen at 200.
The newest estimate of bad loans in Japan: an even one trillion dollars.
Last in a bad week, Moody's announced that it is reviewing Japan's Aaa credit rating for downgrade together with the surviving triple-A Japanese corporations.
This balance -- red hot U.S. (and Europe) versus sinking Asia -- just got more interesting.
The hope had been that Asian woes would slow the U.S. economy to some polite, sustainable growth rate. It just flat hasn't happened.
Aside from a little export weakness (our total exports, worldwide, are only about 10% of our economy) and pain in the farm sector, the Asian troubles have been a huge help to the American economy. Rock-bottom prices for commodities have eliminated U.S. inflation and goosed the economy to an astounding growth rate.
The against-the-wind hunch here says that sooner or later Asia will find bottom. When it does -- when it just stops deteriorating -- the U.S. will not have slowed down, and Mr. Greenspan will reach for the castor oil.
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