The oil equation broke from pattern this week: prices fell, stocks rose, but interest rates fell slightly, as evidence of a flattening economy dominated energy-price relief. Mortgages are still close to 5.75 percent, and the 10-year T-note yield is trading in cheerful economic pessimism, back down to 4.2 percent.
The bond market had waited all week for Federal Reserve Chairman Alan Greenspan’s address this morning at an annual convention of central bankers in Jackson Hole, Wyo. (Hair-down banter around the old campfire: “Nice necktie.” “Thank you, but relative to my family’s cost-benefit curve, possibly unsustainable.”) This time the chairman didn’t say anything dangerous – just a reminder that we should expect to wait an extra few years for our first Social Security checks.
Economic data were thin, but consistent with a Conference Board description of an economy “no longer firing on all cylinders.” July orders for durable goods improved, but the flattening trend is unmistakable; and July home sales tailed (new homes off 6.4 percent, resales down 2.9 percent), but the slowdown is not yet even a trendlet.
On balance, the Fed may be able to continue to withdraw its excessive ease, taking the Fed funds rate from 1.5 percent to 2 percent by year-end. However, if economic data don’t pick up quickly, the Fed is going to have to change its rhetoric and plans.
The largest economic puzzle: Why the economic downshift?
Corporate profits rose some 32 percent annualized in the 1st quarter, racked up another 20-something in the 2nd, and that after two 20-something years. Overall corporate profit margins are the highest since the 1920s – yet, fewer employees receive health coverage or retirement benefits, and businesses have backed away from hiring and new investment. Faint consumers are easier to figure, lower-earners pressured by energy prices and the reversal of corporate bennies.
Still, why the caution, the national pullback?
I think Iraq. There is a quiet corrosion underway (very quiet: even friends don’t want to talk about it anymore), enhanced by the ill-defined nature of our predicament, information and understanding poor at all levels. We don’t really know where we are, except that we are there and have to stick it out; and the place, people and situation so alien to our experience that there is little debate about alternate strategy, and no sense at all of outcome in time or kind.
This presidential election is the oddest in my lifetime. An incumbent with a pretty good economy should breeze to re-election, 55 percent-45 percent or better. Instead, the thing is a dead heat, Bush neck-and-neck with an opponent whose sole advantage is that Iraq was not his idea. Absent Iraq, John Kerry might not even have been nominated; his military service made him the best Not-My-Idea available. The next 60 days’ combat intensity and appearance of stability in Iraq may decide the election, only 18 months into the adventure. Lyndon Johnson had been neck-deep in Big Muddy for four years before voters had enough of him (and he enough of them).
Here is corrosion: the excellent conservative-realist journal, “The National Interest” (those on the left would do well to study it – know thine enemy), just ran a 14-article Iraq Symposium. Only three opinion-makers said they still thought the invasion was a good idea. The keynoter in the issue, Francis Fukuyama, took on the king of unilateral intervention, Charles Krauthammer, in his own forum: “…Utterly unrealistic in his overestimation of American power…” and damned the democratic-Iraq nation-building venture as “unmanageable.”
When conservatives begin to look for the exit (authors were opposed to “precipitous” exit, but some considered other sooner-than-later forms), you can bet that caution in the executive suite has more cause than a spike in oil prices.
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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