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June 16, 2000
This week brought another sign of economic slowdown, and mortgage rates began to drift under the 8.25% mark.
Retail sales fell .3% in May, and a reported .4% drop in April was revised down to a .6% slide. No anomalies, no seasonal distortion, no second guessing: the torrent of consumer spending has slowed to mere... flood.
As the Fed's objective has been to cool the economy, and not ice it altogether, the market consensus now assumes that the Fed will hold steady at its June 27-28 meeting.
For mortgage rates to fall further, we need news of a deepening slowdown, and that's not yet in the cards. The next chance for a surprise on the slowdown side will be during 4th of July week, when we get the next jobs report.
This slowdown is peculiar in that it is not following the normal script found at the end of Fed tightening cycles.
The first and largest oddity is the housing market. Six rate hikes from the Fed over a year's time, a cumulative 1.75% increase, should have hurt the housing market badly by now. Instead, the market is fine: aggregate numbers are off their all-time record highs, but have stabilized near the average of the last two years' very fast pace.
Nitwits in the financial press persist in reciting "housing-hurt-by-high-mortgage-rates", but the tale is nonsense. Mortgage highs in May pushing 9.00% would have hurt had they persisted, but the quick return to 8.25% mortgages isn't going to hurt anything. 7.50%-8.25% has been the normal range for the last ten years.
Any evident slowdown in the housing market is more likely due to a nationwide shortage of inventory, and high prices -- which compounded at a 6%-plus annual slope through the 1990's.
The second peculiarity in this economic downshift is the absence of layoffs. There are some tentative signs of a slowdown in hiring, but that can be an artifact of labor shortage. Perversely -- having nothing to do with Alan Greenspan -- it is possible that the economy is slowing because there is nobody left to hire.
The Fed's "beige book" included these May comments: "...manufacturers cut back on production due to an inability to find enough workers" (Philadelphia), "...shortages of skilled workers persist" (Cleveland), and "...businesses struggled to find workers" (Atlanta).
Yet, again oddly, employers are not offering higher wages to attract more workers because employers can't raise prices to make the money to pay the higher wages.
Instead, businesses just... slow down.
One normal effect of Fed tightening has arrived: community banks are reporting that deposits are scarce, and expensive, which may limit credit, and drive cost-of-funds indexes to levels not seen since the early 1990's.
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