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December 13, 2002
Mortgage rates stayed about the same this week, holding near 6.00% with the lowest fees, just above the all-time low set in October.
New economic data were technically peculiar, and subject to more interpretation than usual. Observers in and near the stock market found the data indicative of improving conditions, and in the watchwords of these optimists, "2003 may be a little slow, but we're just sure that 2004 and 2005 will be terrific."
Aggregate retail sales increased modestly in November, but in one of the best indicators available, sales at stores open at least one year barely nosed ahead of 2001. Autos tailed. The November improvement in new claims for unemployment insurance collapsed in December; nobody is sure which trend is correct. Wholesale prices fell in November, reinforcing fears of deflation, but may have been only a counter-move to an oddly large increase in October. Consumer confidence posted a second-straight monthly rise, but from a nine-year low, and still at terrible levels.
Observers outside the stock market felt the data continued to show a shaky economy, or were too slim and odd to indicate anything. The Fed was the leader in the latter group. The central line in its Tuesday release: The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot."
You flunk freshman English for "not inconsistent" usage, and most traders would like to strangle the Chairman for his incessant description of our predicament as a "soft spot." The Chairman must euphemize, but "soft" is not the first description that comes to mind for the conditions following the detonation of the largest business/financial bubble in history. How about "unstable," or "atypical cycle," or "unresolved recovery"...?
Quibbling aside, the Fed is right: we are working our way through, but are not yet through, and we don't know how long it will take to get through. We haven't had to work through something like this since the 1930s, though our financial system is designed to prevent a repeat of the 1930s, and thus far is doing so very well.
This week, the Fed released the minutes of its November meeting, at which it cut its rate from 1.75% to 1.25%. The Fed's staff acknowledged that the economy has departed from post-WWII cycles, and that growth "would be relatively muted for some time." Further, the effect of last year's tax cuts has faded, the end of the mortgage-rate decline will slow the flow of cash from home sales and refinancing, and "strengthening in business investment has not materialized."
Ouch.
There is good news, however. The Bush administration's economic housecleaning -- though late -- is very good work. Departed Treasury Secretary O'Neill is a good guy, but was neither connected to the financial markets nor to Congress. Harvey Pitt, gone from the SEC, and Lawrence Lindsey, excused from the White House, shared anti-telegenic corpulence and obtuse operational style.
The new crew? Grown-ups, in every way. There isn't anyone more market-savvy than new economic advisor Stephen Friedman, who was co-chair of Goldman Sachs with Robert Rubin, the brightest light of the Clinton administration. The best indications about Mr. Friedman and John Snow, new at Treasury: the Republican hard right is angry that neither man is a supply-side wing nut. Both are centrists.
There is nothing in this new team that will cause Americans to rush to the local mall to spend, but the odds of our working through this atypical and unstable post-bubble aftermath just went up.
In the meantime, the odds of a new-record low for mortgages this winter are still pretty good.
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