|
July 7, 2000
This week's data have removed all doubt and debate: the economy has slowed, perhaps all the way to the Fed's presumed 3% speed limit.
The interest rate response is muted, as the markets have been leaning toward a slowdown since the June 2 release of surprisingly weak employment data for May. Mortgages are down to 8.125% this morning for low-fee deals, the same as in that first week of June.
Three reports made the slowdown unmistakable.
On Monday, the National Association of Purchasing Management announced the fourth straight drop in its index, down to 51.3% for June. Figures north of 55%, where the index was last winter, indicate rapid growth; while the 50% level reflects a flat economy.
On Thursday, "same-store retail sales" (sales at stores open for at least one year, insulated from new-store distortions) showed their weakest results in three years. While the 3.4% gain was poor, and took the inflationary edge off of record-high consumer spending, it shouldn't be confused with pre-recession behavior.
Third, this morning's news confirmed a slowing job market. Until today, nobody knew whether the weak May data (the outright loss of 116,000 jobs) were a fluke, or authentic evidence of a slowdown. Downshift confirmed: in June, payrolls grew by a slim, 11,000 jobs.
How could a 200,000-job-a-month economy suddenly stop on a dime? Will mortgage rates soon fall into the sevens? Has the Fed overdone its campaign, and will it have to unwind some of its rate increases?
Whoa, there, Nellie.
The job stats are often distorted by seasonal adjustment, especially in summer. And, while payroll growth has theoretically slowed, the unemployment rate fell, which supports the idea that payrolls aren't growing because there is nobody left to hire.
Possible flaws in the data aside, the economy has slowed. Maybe enough to declare an end to this tightening cycle, maybe not; but nowhere near slow enough for thought of the Fed cutting its rate.
The Fed will be very cautious about reversing its field, if for only one reason: the stock market.
I don't think there is any question that a flat stock market in 2000 has contributed to a slower economy. Nor is there any question about the stock market response to a premature easing by the Fed: the stock market and the economy would instantly take off into another "wealth effect" spiral.
So long as the Fed has to hold the overnight Fed funds rate at 6.50%, it will be very difficult for mortgage rates to fall into the sevens. We need a slower
|
