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December 6, 2002
A week-long drumbeat of poor economic data, culminating in today's report of job losses in November, was enough to take low-fee mortgages back down to 6.00%, but not enough to restore the panic necessary for a return to the high-fives.
Not yet.
In the last two years, episodes of panic have begun in the stock market and spread to bonds and mortgages, as frightened money forced interest rates down. Today's early-morning job data had markets right on the edge of stampede, but was quickly followed by the resignations of Treasury Secretary O'Neill and chief economic advisor Lindsey, and leaks of a new, huge "economic stimulus" package from the White House. The prospect of more tax cuts, including taxes on dividends, reversed the stock market decline, which in turn put a floor under interest rates.
The economy decelerated in September and October, marked by the October 8 Dow Jones low at 7,286. At mid-November, preliminary data looked better: the economy had at worst flattened out, no longer declining, and might have begun the mythic recovery so confidently expected in stock market circles since January 2001. The Dow put in its best-ever late-fall stretch, rising 20%, nearly to 9,000 by Thanksgiving. Mortgage rates rose in tandem, pushing 6.375% at last week's high.
Comprehensive data for November arrived this week... flat. A true economic recovery remains an optimistic glimmer, a mirage shimmering off there with the "new bull market" for stocks. Bull, indeed.
The purchasing managers' survey dipped below 50 instead of rising above. Payrolls lost 40,000 jobs instead of posting the expected same-size gain; the unemployment rate jumped to 6% instead of holding at 5.8%; and the three-week decline in new claims for unemployment insurance appears to be a seasonal quirk, not a true sign of an improving economy.
Flat data, but no panic. Cash is trickling back into commercial paper (unsecured, short-term IOUs issued by giant corporations), a market that had locked up tight in the early-fall fright. Credit spreads in the corporate bond market have held their narrowing trend, as fearful money left Treasurys for previously too-shaky-to-touch business credits.
How much faith to put in the coming stimulus package, and a re-organized economic team?
Less than the stock market has. For one thing, it will have to be enacted. Moderate Republican Congresspersons have already expressed fear that the party's electoral advantage could be wasted on excessively Republican measures. Double taxation of dividends has been economically corrosive, and an end would no doubt prop the stock market, but there is a political limit to Christmas for Rich People.
Our current economic difficulty is resistant to normal spending stimulus, and even to record-low interest rates. Better tax treatment of dividends would theoretically spur new investment, but corporate America doesn't want to make new investments because it can't use the productive capacity it already has.
Nothing in new tax cuts or Keynesian spending will help United Airlines. Nor would they repair the utterly bungled strategies of AOL... thirty-five million subscribers, and no future. We are on the far side of a business bubble, and recovery is going to take time, not a magic wand.
In December, the best chances for mortgages in the fives: a new swoon in stocks, poor holiday sales, or deepening trouble in Europe, whose combined economies will probably shrink in the next 90 days for the first time in ten years.
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