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July 6, 2001
News that payrolls shrank by another 114,000 jobs in June has not helped mortgage rates today, but it did offset earlier reports of economic recovery and pushed the chance of a rapid rise in mortgage rates off over the horizon.
The contest between the everything-is-fine, recovery-is-on-the-way optimists and the yes-but, head-scratching skeptics has reached an odd and slightly spooky phase.
The optimists are dominant, especially in the stock-pushing crowd. They take on faith the delayed but certain effect of the Fed's extraordinary easing by the fourth quarter of this year or the first of the next, and see signs of recovery already.
They point to the Purchasing Managers' reports for June: their manufacturing index emerged from a recessionary 42.7 reading to 44.7, and the service sector bounced from 46.6 in May to 52.1. June car sales neared the '00 record.
Further, say the optimists, the Fed's work will be boosted by falling energy prices: gasoline has fallen $.24/gal in a single month, while prices should be rising in the traditional summer game of skin-the-vacationer. Natural gas is down almost 60% from its winter hysteria.
Skeptics think there is something missing in the recovery assumption: corporate earnings. Nobody is making good money, and too many companies aren't making any; ultimately, cost-cutting to restore profits will whack the economy again.
The stock market hypes were fine early this morning with the payroll news, as "everybody knows" that layoffs come late in economic cycles, often as the economy begins to recover. But the bulls had uniformly sick looks as they tried to explain the earnings news of the last 24 hours.
EMC, the leading maker of data-storage systems, announced its earnings were only one-fourth of analysts' expectations, and within a few minutes its stock fell by one third. AMD, the number-two chip-maker, dumped a quarter of its stock value after only one-fifth of estimated earnings arrived. BMC, a leader in network software, blamed poor economic conditions in Europe for missing analysts' profit forecast by one-half, but lost only one-tenth its value.
All in all, a tough day for fractions, the alphabet, analysts, the stock market, technology, and belief in nearby recovery.
I'm with the skeptics, for now, and carry the creepy, hollowed out sense that the consumer would not be spending quite so freely, propping up the economy, were businesses not offering to sell everything they have at an incentive-laden loss.
The next substantial move in mortgage rates will depend on the durability of the U.S. consumer, and whether Europe and Japan can avoid a deep slowdown of their own.
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