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August 17, 2001
Mortgage rates have reached the lowest levels since January -- 6.75% to 7.00% depending on origination fee -- and the cumulative weight of new data is exerting more downward pressure.
The economy?
A simple, one-word answer: flat.
As flat as flat gets. Retail sales in June? Unchanged from May. Retail sales in July? Unchanged. It doesn't feel like May, but it's still May at the local shopping mall.
The harrowing, ten-straight-month decline in industrial production... flattened in July, down only point-one percent. At that, only 77% of industrial capacity is in use, a twenty-something-year-record low.
New claims for unemployment insurance are... flat, the weekly figure holding just below the scary 400,000-plus racked up briefly in early summer.
There are a few non-flat sectors, but the negatives pretty much cancel out the positives. By some measures, excess inventories have been cut to levels which will trigger new orders; but by other measures, sales are falling faster than overstocks have been slashed.
Housing is still in excellent shape, as starts of new homes jumped 2.8% in July, improving on the solid 1% gain in June. However, in the weakest non-flat news of all, business profitability is awful, led by Ford's news today that it had missed its profit forecast by a mere 42%. Oops.
While these are not recession numbers, they aren't recovery numbers, either.
For a half-century, a recession has been a necessary precondition for a substantial drop in mortgage rates. The combination of fear, absence of inflation risk, and Fed easing which accompany recessions does the trick.
Since January, confounding consumers, mortgage rates stayed unchanged, just above the record-low 7.00% level despite extraordinary Fed easing, a dose of fear, and miniscule risk of inflation. Long term rates have held steady in expectation of rapid recovery: surely the Fed's chopping in half the cost of short term money would cause a rapid turnaround... surely technology would bounce us back to 3%-plus growth. Surely.
Surely not.
On Tuesday the Fed will cut its overnight rate from 3.75% (6.50% in January!) to either 3.50% or 3.25%, and -- whichever -- markets will immediately speculate on how soon the Fed will cut to two-something (the last time... 1962).
In the absence of recovery, the yawning gap between short-term rates and long exerts enormous drag on long rates, and can drag mortgages into the sixes without a recession.
Flat may be enough, by itself.
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