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August 11, 2000
Mortgages reached a new low for year 2000, near 8.00% on the lowest-fee packages before beginning to reverse this afternoon.
The data pattern helping the markets to this new low is remarkable: the economy is still very strong, resisting the impact of a year's worth of Fed tightening, but simultaneously -- incredibly -- not generating any inflation pressure at all.
For a three-year stretch, 1996 into early 1999, people in the financial markets joshed about the "Goldilocks" economy -- not too hot to cause inflation, and not too cold.
This economy, 1999-present, is hot enough to melt her cute little spoon.
Today's example: July retail sales figures arrived at a .7% gain, roughly double the consensus forecast, and the strongest gain in five months. The consumer, presumed to be slowing down, sated, exhausted... is none of the above. The bears are boiling the porridge again.
The insulator between the heat and an inflation conflagration is productivity -- and the productivity numbers are astounding. Second-quarter productivity surged 5.3%, building on a 5.1% year-over-year gain, the largest in 17 years.
That 17-year gap is an important hint about the magnitude of our good fortune. Productivity tends to put in its best performance coming out of a recession, as businesses try to feed rebounding demand with recession-level workforces, reluctant to hire until the economic expansion is confirmed.
Contrariwise, towards the end of an expansion, businesses are running fat, and the slightest slowdown in demand and therefore production causes a fall in productivity by the expanded workforce. Our current expansion is in its tenth year, the longest in American history, and productivity is racing ahead at the same pace as in 1983, the first year after the worst recession in the last half-century.
Wherever you are, genuflect in the direction of the nearest computer.
If the productivity performance were not enough, labor costs are behaving in a way no one thought possible. Despite rising compensation, pushing to a threatening 4.5%+ level, unit labor costs are falling. Workers are making more money, but in such productive fashion that the labor component of product costs is .4% lower than it was a year ago.
Wherever you may be, offer your computer some porridge.
All this good news notwithstanding, don't get carried away: mortgage rates are not going to fall a lot until the Fed contemplates easing, and that prospect is not in anybody's cereal this morning.
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