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July 27, 2001
During my last week-long vacation on Cape Cod, three years ago, Russia defaulted, Long Term Capital Management collapsed, Bill Clinton confessed, global recession threatened, and mortgage rates began a record decline.
No drama this time, though we did encounter a little allegory over Iowa. Near a thunderstorm, our 757 sank suddenly and continuing flight did not entirely or quickly offset the sense of misplaced stomach.
So it is for the economy: we are still airborne, neither gaining nor losing much altitude, but you want to keep the ol' tray table in the upright and locked position.
Any glance at CNBC will get you some grinning stock-pusher announcing that recovery is at hand. The more serious commentators take for granted that Fed rate cuts will sooner or later trigger a recovery, but springtime optimism for the end of this year has drifted to hopes for 2002.
Chairman Greenspan testified twice in the last ten days, and described conditions necessary for economic recovery. In order, he listed the tax cut, falling prices for energy, and reduction of excess inventories. Then, "...most important" for recovery, the need "to resume increases in capital spending... provided by the continuation of cost-saving opportunities associated with rapid technological innovation."
Okay, believe The Man. Technology is still the deal: for recovery to amount to anything, the collapse in technology must stop, and reverse.
Consumers are still spending, and homes are still selling (up 2.9% in June) and rising in value (up 8.8% nationally in the last year), but neither of these trends will accelerate from already-strong levels.
Technology is still in free-fall. In this morning's 2nd Quarter GDP report, business investment in equipment dropped at a 14.5% annual rate, the worst performance since the deep recession in '82. New orders for telecommunications equipment fell 21% in June, down 61% from June 2000.
The blowing of the dotcom bubble was partway funny, and satisfying, as so many so mistakenly convinced of their brilliance so richly deserved to lose their shirts. The telecommunications crater is not funny at all. JDS Uniphase wrote off $44 billion in assets yesterday.
Technology must stabilize, then lead, but how that may happen is not clear. The internet as the leader of commerce is now a bad joke. (The rate of increase in Amazon's sales of books last year? One percent.) Prospects for the PC aren't so hot either, as nobody especially needs another gigabyte of anything.
Until Mr. Greenspan's next wave of "technological innovation" arrives, mortgage rates will benefit from economic air pockets, maybe as soon as next Friday's job data.
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