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June 15, 2001
Struggling with a shifting, hard-to-read economic situation, Wall Street prognosticators have adopted a descriptive, alphabetic shorthand.
One month ago, strong data for April suggested an early economic recovery -- a "V-shaped" outcome -- and mortgage rates rose to the high of the year, about 7.50%.
Two weeks ago, initial reports from May were on the weak side, and speculation turned to a longer flat spot, a delayed recovery, but strong when it finally arrives -- a "U-shaped" year.
This week brought more May data... really lousy data, and the alphabetologists are talking about an "L-shaped" affair: a weak, fragile economy with no recovery in sight. As ugly as it looks, it is helping mortgage rates: an origination fee will buy a 30-year rate in the high sixes.
(Sooner or later, some irresponsible sort was bound to take this letter-think too far.
I can't help myself. If this economic episode turned out to be a double-dip followed by a recovery, would that be the "W" recovery?
Or, if we slip off into recession... since there is no letter describing two dips followed by straight down, would we call that a "W" with a suicidal right wing?)
The newest May data show a manufacturing recession getting worse, deepening month after month, now eight straight with no sign of bottom. Industrial production fell .8%, and utilization of capacity fell to 77.4%, the worst level since August of 1983 -- which was a horrible time, in the middle of the dismantling of the Rustbelt.
The Fed's "beige book" made sad reading: Boston, "negative sales"; New York, "slack"; Cleveland, "generally weak"; Kansas City, "weak"; Dallas, "sluggish." A second round of layoffs has started: Dell, after dropping 1,700 people in February says it plans to cut another 3,000-4,000 people; 3Com cut 1,200 in February, another 3,000 now.
The hope has been -- still is -- that a combination of confident consumer, strong housing market, and Fed easing would prevent manufacturing weakness from spreading to and taking down the rest of the economy. We are going to find out soon: retail sales staggered to a point-one percent gain in May, and despite good sales, listings are beginning to pile up, un-sold.
Mr. Greenspan will tell us how worried he is on June 27: a .25% cut to 3.75%, not so worried... if he goes a half-point to 3.50%... he's worried.
And not just about us. In the world's longest-running death watch, Japan is descending into a new spiral. Its GDP contracted .8% in the last quarter, and even its own economists described the situation as "deteriorating."
Favorable for mortgage rates, but not pretty.
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