|
August 29, 2003
Mortgage rates stayed in the 6.25%-6.375% range for a second-straight week, but this week's stability was a pre-holiday and pre-big-news illusion.
On Tuesday and Friday next week, we will get the first reports from August: the purchasing managers' index, and job payrolls. The future of interest rates now depends on the rate of economic acceleration: we know the economy entered an up-trend in June, one which increased slightly in July. Next week we will learn if expansion continued at the July slope, increased further, or plateaued out.
I think bond and mortgage markets are priced for an extension of July -- a slope of growth either steeper or lower would surprise, and rates would follow.
In a normal recession/recovery cycle, everybody in the markets watches aggregate GDP growth, certain that a sustained uptrend will produce inflation pressure, in turn generating unwelcome attention from the markets and the Fed.
This cycle is so thoroughly out of pattern that "cycle" is an inappropriate term. We will feel the ripples of the largest financial bubble in history for years to come. Aside from the rah-rah cheerleaders at Camp Kudlow, and the reflation/inflation worrywarts at PIMCO, most observers are trying to figure out what kind of economic acceleration is underway.
For example, everybody knows about the "jobless recovery" puzzle. Far too many observers, I think, dismiss lagging job growth as typical of recession cycles (this is not a typical cycle...). The most recent series of weekly claims for unemployment insurance shows a decline of about 40,000 per week from the worst of the winter, but any economic acceleration in August failed to push overall claims significantly below the 400,000 mark. Anecdotal evidence leads to jobs exported overseas, and low-confidence businesses still reluctant to hire, but nobody really knows why hiring is lagging so late and so deeply.
Both the University of Michigan and Conference Board surveys of consumer confidence show the same things: no material increase in confidence since June; confidence not increasing with economic activity; and employment fear as the primary impediment to rising confidence.
Consumers are spending freely, but we don't know how sustainable the trend will be; or, if it is sustainable, what impact the spending will have on the rest of the economy. In a high-reliability and fresh indicator, Wal-Mart raised its August sales estimate from a 3%-5% range to 4%-6%, attributing the performance to IRS rebate checks and withholding cuts. Whatever it is, there is something unsustainable in the spending: today's report of July personal income showed a .2% increase, while personal spending grew four times that rate.
Business conditions are better than last winter, no question. Business capital spending fell 4.8% in the 1st quarter, and rebounded 8.2% in the 2nd. Orders for durable goods rose 2.6% in June and 1.0% in July -- both good numbers, but where goeth the trend? Up, or flattening? Pipeline-filling from a lousy winter, or picking up speed into the fall? The big consumer spending, temporarily goosed by government goodies -- will it help businesses to regain confidence... here, or in China?
2nd quarter GDP growth has been revised up to a strong-sounding 3.1%. Perhaps a third of that growth is traceable to a one-time, 45% surge in defense spending, and another third to one-time effects of a depreciated dollar (now appreciating) and a rebuilding of inventories overdrawn in the 1st quarter.
I mean no gloom. The economy is better. However, in one great spasm in late June into July, the credit markets built into rates an expectation of a self-sustaining, strong, maybe roaring economy, including the threat of incipient inflation.
Next week's August numbers have a lot to live up to.
|
