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October 4, 2002
Mortgage and other long-term interest rates hovered just above their record lows, held as low as that, I suspect, more by war fear than economic weakness.
Brand-new data for September describe an economy no worse and possibly slightly better than July-August, which could have produced higher rates. However, two big moves in the financial markets this week instantly followed war news: the Dow soared 350 points on Tuesday on flimsy news of peace, and stock sagged at mid-morning today on the announcement of the President's speech Monday night.
The first week of each month brings more economic data than the rest of the month combined, and includes the first data on the immediately preceding month. These reports are often definitive.
This batch was not. The most important ones, on the job market and from the Institute for Supply Management, were a contradictory hash, as actual changes in the economy were masked by the range of error in survey methodology.
Still, the absence of clear change in the economy shifted the outlook: many, self included, had expected the economy to continue its July-August slide. The economy did not. Most of us pessimists have assumed greater damage to the economy from stock market losses than has been the case. This year the stock market will post its third-straight losing year since 1941 (unless it manages a forty-something percent rally in the next 90 days), but the economy is still poking forward.
The optimists still have some hoping to do. An optimist, now, is someone believing in low-normal but sustained GDP growth; the strong-rebound crowd is pretty much gone, except for hyper-caffeinated appearances on stock-tout channels. Federal Reserve officials lead the hopers, presumably sent on tour by Mr. Greenspan, as they all follow the same script, three appearing each week.
If you think it would be glamorous to be a Federal Reserve Bank president -- making policy, the seat of power, and all -- think again. Jack Guynn, president of the Atlanta Fed, this week did his cheerleading duty: "...We need patience... the most likely path over the next year or so will be one of moderate growth." The audience energized by this call to the faithful? The Columbus, Georgia, Rotary Club.
Hopeful stuff like this is all we have until corporate America can get itself untangled from too much debt, too much capacity, and too many horrible investments in a fantasy future. The adjustments continue: stock in Cisco, once the most valuable corporation in the world, fell below ten bucks this week.
I don't think there is any doubt, now, that the sole sustenance for the economy, the one that can get us through this hopeful interval, is the threefold effect of falling mortgage rates. First is the reduced cost of monthly payments, second the cash extracted and spent, and third the translation of low rate into increased value. The first two get the press, but the third may be the most powerful force.
Total payment reduction across homeowners is offset in large part by the nearly half of refinances going from 30-year to 15-year, payment unchanged -- savings behavior, not consumption. However, low rates have dramatically increased purchasing power: a $1,500 payment at the 8.00% (or so) average rate in the 1990s would borrow $204,400; at 6.00%, the same monthly payment will borrow $250,000 -- resulting directly in higher values of homes, not a bubble in progress.
A lot more people have a lot more wealth at risk in their homes than in stocks, and the general rise in home values has probably offset stock losses, so far. At that, the low-rate bonanza is just buying time until the corporate world turns: in a seminal piece at pimco.com, Bill Gross says we've got about a year. By then, mortgage rates would reach absolute bottom, and the economy would have to fend for itself.
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