An inflation-inspired popup in rates is reversing on news of a weakening economy. Mortgages are still above 6 percent (they touched 6.25 percent at Christmas Eve worst), and markets will now hold until the release of all-powerful payroll numbers on Friday, Jan. 4.

An inflation-inspired popup in rates is reversing on news of a weakening economy. Mortgages are still above 6 percent (they touched 6.25 percent at Christmas Eve worst), and markets will now hold until the release of all-powerful payroll numbers on Friday, Jan. 4.

The inflation news before Christmas was disturbing: The indicator was a technical one (“core personal consumption expenditure deflator”), but a Fed favorite jumping the 2 percent top-of-target range. Not by much, 2.2 percent year-over-year, but 2.9 percent in the last three quarters. “Headline” overall CPI is north of 4 percent, felt by everyone.

New claims for unemployment insurance are in an unmistakable uptrend, at 350,000 weekly within 20,000 of the level at onset of the last two recessions.

November data is old, but indicative: Orders for durable goods crept to a 0.1 percent gain versus 2.2 percent forecast, and personal spending soared by 1.1 percent, personal savings going negative by 0.5 percent — hardly a sustainable party. Markets reacted to Friday’s report of a 9 percent collapse in new-home sales as bad news; it is not — we need these “incentive” discounters to take a couple of years off.

New Year predictions? Don’t be silly. Not for 2008.

Instead, herewith a “bracketing” forecast, the probability borders of happy and poor outcomes set by today’s mid-range optimists and pessimists. Outliers — the wacky fringe — need not apply (which excludes at least half of the commentariat).

First, on recessions in general: They are rare. Since the worst in modern times, the double-bottom ’79-’82 affair, we’ve had only two, both short and shallow affairs, 1991 and 2001.

If you watch nothing else, watch the job market. Sensible optimists call for job “stability,” meaning marginal gains and a gradually rising unemployment rate, the consumer staying in the game. Heard everywhere: “Historically, it’s a bad idea to bet against the consumer.” Reluctant pessimists counter that the job market is a lagging component of the economy, breaking after the start of recession.

Inflation. So long as oil, commodity and food prices behave as they have, it will be hard to find an optimist. In this case, bracketing goes to the world economy, and is three-sided. Economic optimists, many believing that a go-go world has “de-coupled” from the United States, are the inflation worrywarts; the slowdowners think that inflation is another lagging component and will fall back. The third bracket, pushing in from the cutesy sideline, says “stagflation.” (I’ll be judgmental, here: Stagflation was coined in the ’70s during very high inflation and unemployment, both insignificant today by comparison. The stagflationists just can’t make up their minds.)

Credit crunch. The hopeful see markets digesting trillions in bad assets “in a couple of quarters” — Goldman Sachs. The non-apocalyptic skeptics see an impaired system short of credit suppressing growth for years — Goldman Sachs (different guy).

Housing. Given an absence of optimists, I’ll speak for the missing: Foreclosures will rise until 2011, but damage to the overall economy from housing alone (as opposed to the wreck in the financial system) will be less than forecast, as will be credit losses. Prices will stabilize in most Bubble Zones in 2008. Pick your own pessimist.

The Fed. Bernanke’s solution to failure as a communicator is to stop trying. Hence, all is guesswork. Truly expert monetary mechanics are in a fierce argument, unable to tell if the Fed is fire-hosing cash to float the economy (and failing), or syringing just enough into banks to keep them alive. The range of serious opinion includes: Bernanke is a courageous, modern-day Volcker who will let the economy slide as far as he can to squelch inflation; or, now at the limit of the Fed’s traditional power, is a passive Chairman. Quite incredible that we cannot tell which.

The World. Biggest forecast gap of all. Globalists expect strength to pull all through the credit wreck; old-timers look for Europe then Asia to follow the U.S. into the tank, then the U.S. to pull everybody out in 2009. I have increasing fondness for old guys.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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