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September 28, 2001
The stock market has found at least a temporary bottom, as have mortgage rates, but the economy has not -- which may lead to new lows in items one and two.
Measuring the state of the economy is going to take time, and is less a job for an economist than for a psychotherapist.
The economy is just now finding some sort of baseline, a mini-recovery from the paralysis after 911 Day. Two reports due next week are based on late-September surveys and will give some initial read on that baseline: the Purchasing Management index on Monday and the Labor Department's payroll data on Friday.
However, we won't get a trend picture -- whether the economy is falling from the post-911 Day baseline or rising -- until these same two reports come out in the first week of November. Complicating the time-lag in data collection and reporting: the total absence of similar events in modern American economic history.
The financial markets are full of people who can give you the two-decimal probability for a rise or fall in stocks on odd-numbered Thursdays in October depending on who wins the World Series... but, for this? This? Nobody knows.
The national psyche has gone from shock to grief to post-traumatic stress disorder, heavily laden with personal insecurity. Therapists tell me there is no cure but time, and lots of it. I expect the economy will follow the course of psychological recovery.
Ernest Hemingway defined courage as "grace under pressure." That, we have in abundance; healing and recovery, we do not.
After 911 Day, the bond market ran to cash. Nobody wanted to buy bonds or mortgages for fear that a renewed deficit and the Fed's extreme ease would cause inflation.
This week, falling oil prices, OPEC's wise refusal to cut production, and awareness that the economy is stumbling ahead on inertia alone have overwhelmed any worries about deficits and inflation. Long Treasury yields have fallen about a quarter percent, as have most mortgage rates.
While Treasury and other short-term rates are likely to continue to fall, mortgages have hit a temporary barrier: waves of refinances. In 1993, 1998, and 2001 we refinanced everyone with good credit, a rate above 8.00%, and a telephone. Those with rates in the sevens have been waiting patiently... impatiently... maybe fifty million strong.
Rates are today 6.75% with the lowest fees, the same rock bottom as in 1998. Each one-eighth percent drop in mortgage rates from here will trigger five to ten million calls to lock refinances, each of which will result in a bond "sale" order in the markets, and in concert prevent a rapid decline in mortgage rates.
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