April job growth was slightly off expectation, and that has given long Treasury notes and mortgage rates a breather, but nothing more.
The whole fool world of finance, including the Federal Reserve, assumes an economic slowdown near ahead, but the actual data is hot. Until this mythic slowdown appears, long-term mortgage rates remain on hair trigger for 7 percent.
Today’s April payroll forecast called for 200,000 new jobs, and 138,000 actual produced a relief rally in bonds. However, wages are rising at a 4 percent pace, and every inflation measure is flashing red: one of the best (PCE deflator) rose at a 4 percent rate in March, up 2.9 percent year-over-year, and the core is at the Fed’s tripwire, up 2 percent.
In other April numbers, the purchasing managers’ indices accelerated above forecast, manufacturing to 57.3, the service-sector to a screaming 63; and retail sales jumped 6.8 percent (“same-store” preliminary). Through April, Federal tax receipts are running ahead of forecast by more than $100 billion.
The Economy That Would Not Die
Forecasts everywhere from Goldman to Pimco to the Fed itself say that the combination of energy prices, over-leveraged consumers, weakening housing, less cash-out refinance money, and 15 short-term interest rate hikes over two years are all but certain to slow the economy. Their certainty is entering its second year, and they don’t even seem frustrated, just more certain. Why is the economy oblivious to all these good reasons for a fainting spell?
At the top of my (new) list (I used to be with the surefire slowdowners) are the tax cuts of ’01 and ’02. Back then, we assumed the impact was one-time-only, and that assumption has proven to be mistaken, as dramatic bracket reduction and the reduced burden on investment income has had durable stimulative effect.
Politico-philosophical thicket: the “Righties” have been right that the cuts would raise tax revenue. The “Lefties” have been right that the cuts have favored the “rich,” but are grossly unfair in failing to notice that the “rich” were/are the ones who pay taxes in the first place. Evidence: the enormous, three-year surge in federal and local tax revenue is non-withholding income — instead it is taxes paid on bonuses, capital gains, dividends, commissions and options. Will all boats rise with this tax “inequality”? Dunno, but the economy sure is rising. (Now to make the “Righties” mad: the Fed needs some help, and the best hope for low interest rates is a tax increase in trade for spending cuts.)
Second on the “why-we’re-hot” list: global trade. Yes, the U.S. is running an unsustainable trade deficit, but the far bigger and better news is the increase in overall trade volume worldwide. The ideal outcome is underway: each trading partner makes a profit on everything it sells, each getting richer the greater the increase in gross volume. There are a variety of ways to screw it up (war, inflation, protectionism, oil panic), but the world for the moment is restraining itself.
Third on the list: housing is slowing, but if your home doubled in value in the last five or 10 years, it is still worth twice as much as it was. If it steadies for a while, even losing ground versus inflation, you still feel rich, and you should.
Housing is slowing, but so long as damage is limited to mortgage lenders, the economy will survive: in announcements this week, sub-prime lender Ameriquest will lay off of 3,900 and close all 229 branches; Washington Mutual will shut down its entire correspondent lending division.
Fed Chairman Ben Bernanke’s latest effort to communicate (worthy of Clouseau: a weekend dalliance with CNBC’s Maria Bartiromo resulted in her ego-garbled blab on Monday) has accidentally produced an ideal circumstance for the Fed. No one has any idea what it will do after its next-Wednesday hike to 5 percent.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
