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August 7, 2009
A job-market surprise has reinforced the economic optimists and pushed long-term rates close to their highs of the year: the 10-year T-note to 3.86%, lowest-fee mortgages to 5.75%. The stock market is ecstatic, continuing its straight-line July run, the S&P 500 at 1,015 today the highest since early October.
In this morning’s report, payrolls lost only 247,000 jobs in July, a hundred thousand fewer than most forecasts, and barely half the June losses. This first-Friday monthly employment report gets more attention than any because jobs drive consumption and tax revenue; if too cold, they drive recession; if too hot, inflation. Today’s news has the normal-cyclical-recovery crowd as overjoyed as the stock market: the job market tends to turn after recessions have already ended, so this one must be over.
Weekly claims for unemployment insurance give a little support to the payroll surprise, down to the 550,000-575,000 range since the April peak at 668,000, but nothing as dramatic. June personal income completely reversed the stimulus-puffed May gain. The July ISM service-sector index surprised by weakness, to 47 from 48.8.
NAR’s pending home sales surged 3.6% in June, but were not confirmed by other data. Purchase-loan applications are still flat. Distress is still growing in the pipeline: new Fannie/Freddie data have 90-day-plus delinquencies up from 1.12% last May to 3.27% one year later. Since last May, 420,000 foreclosure starts; at 3.27% currently 90-plus... that’s another one million loans going into the tank, Fannie/Freddie alone.
There is nothing unusual about an argument between cyclical optimism and this-time-it’s-different -- every recession-end has one. However, the normal debate is about degree and timing: how strong the recovery, and how soon the Fed will reverse field. This debate is about whether -- if we’ll recover in anything like a normal way.
The extraordinary differences this time: no post-WWII cycle has had a financial system so broken (without capital, still) that it cannot convey Fed easing to the economy, nor have we ever borrowed so much so fast, partly intentional stimulus, partly because tax revenue has collapsed (off 18%) as never since the 1930s.
Take heart: it ain’t just us feeling around for policy in the dark. Take China. Terrified of the threat to stability from any real recession, China last winter turned on the credit spigot, its banks making more loans in the first 90 days of 2009 than in all of 2008. Its real problem: collapse in exports, that sector three times the fraction of its economy compared to ours, its consumers only one-third. The credit flood was intended to float China until US demand for its exports returned; there is no increase in US demand, and the flood has produced a sugar-high in China’s stocks and real estate. No one knows what will happen when the authorities turn off the spigot, as they must.
Take Europe. Germany refuses any dramatic fiscal or monetary action, believing that this is just a big but normal cycle to be ridden out until US demand for exports returns. The rest of Europe is going along, out of pride (France), strength (Scandinavia), fear of alternatives (Ireland, Spain, Italy, Portugal, Greece), and a bad idea (never, ever attempt monetary union without a unified budget and government). Europe is now in outright consumer-price deflation. Many here are disturbed at dollar weakness versus the euro; never, ever wish your currency to stay as “strong” as one in price deflation.
Which leads to Japan, back in deflation, the yen “strengthening,” which makes its collapsed exports too expensive. Nevertheless, Japan hopes that US demand for exports will return. It has no other plan except life-support government spending funded by selling bonds to its citizens, bonds which no one else will buy.
I share the world’s hopes for recovery of US demand. However, the only ideas of ours that have worked are the $8,000 first-time-home credit, Cash For SUVs and F-150s You Bought By Mistake, and Fed life support by imaginary money. I would feel better if the authorities here understood that the panic-stop to the credit binge still has us going through the windshield. We can’t get this wrong: we are the world’s airbag. |
