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April 27, 2001
If this is a recession, I hope the next half dozen are just like it.
In this morning's surprising report, 1st quarter gross domestic product grew at a 2% rate, roughly double forecasts, and let's say... er, incompatible with a decline in mortgage rates.
That wasn't the only healthy data. Sales of existing homes rose 4.8% to 5.44 million in March, while sales of new homes reached a new record, up 4.2% to 1.02 million units.
Head-scratching commentators claim that "falling mortgage rates" are responsible for strong sales of homes, but this hypothesis is difficult to square with a stray fact or two: today's low-seven percent mortgages are the same as they were last Thanksgiving, and mortgage rates have been ever-so-gradually rising since January.
Today's GDP report would have done terrible damage to bonds and mortgages had not the bond market already discounted the chance for a recession.
There are weak spots in the economy, and it is possible that the economy could double-dip back into something worse than the worst of last winter.
The job market is sagging, and next Friday's payroll data may show negative job growth and a sharp rise in unemployment. New claims for unemployment insurance reached 408,000 last week, an eight-year record and the highest since the last recession.
However, lousy employment numbers usually appear at the end of a slow interval for the economy -- a "lagging indicator" -- and while the unemployment rate may rise for the next few or several months, it's hard to associate an unemployment rate in the four-percent range anywhere with authentic pain in the economy.
Business investment is still weak, and it's possible that some negative loop may develop where business weakness leads to layoffs which cuts confidence which in turn softens consumer spending, but you have to have misplaced your Prozac altogether to believe that such an outcome is inevitable, or even likely -- especially given the rebound in the stock market.
And there -- in stocks -- may lie a partial explanation for the absence of recession. At the market's absolute worst in this cycle, the end of March, the S&P 500 had lost 21.7% of value in the prior twelve months. However, over the prior three years, despite that most recent, hideous year, the S&P had returned 3.1%; over five years, 14.2%, and over ten years 14.4%, all compounded annually -- one hell of a wealth-creating decade, retained.
That performance is the difference between a correction and a crash, and an economic soft spot and a recession.
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