The net result of a Fed meeting and a blizzard of brand-new data for July: Long-term rates are unchanged. But some other things are creaking along.
The Fed’s post-meeting statement downshifted from “moderate” growth to “modest” (the words are synonyms in ordinary English, but not at the Fed). At 1.7 percent, annual GDP growth for April through June seemed to outperform expectations, but was actually plodding when revisions and weird accounting are taken into account. The GDP measure of inflation: 0.8 percent annualized, less than half the Fed’s forecast.
The July report from the Institute for Supply Management (the old purchasing managers’ index) jumped the forecast, clear over 55, and broke a weak trend.
Today the whale: Jobs data for July were disappointing in every respect, with only two-thirds the jobs expected, declines in workweek and overtime, and wages rolled back part of June’s surprise gain.
Mortgage rate-watching is a simple affair, now. We will stay put if data continue to arrive below the Fed’s forecast for growth. Markets are badly frightened that the Fed may be right, and so subpar news like this week’s brings no improvement — we need really lousy reports for rates to fall. If the Fed proves to be right, find a bunker.
The QE taper, coming even if data stay tepid, does not matter much. The improved U.S. deficit and tanking production of mortgages mean less paper hitting the market, and reduced buying by the Fed will have the same proportionate effect as before.
The stock market’s serial new-record performances no doubt bring some wealth effect. However, fluff alert: The Sprouts IPO was offered at $18 and rocketed to $35. Grocery stores have notoriously narrow margins and no upside; there is room for only one Whole Foods fairy tale. And Facebook at last traded up to its IPO price, $38.
The greatest chance for a negative economic surprise is still overseas. China’s official PMI found 50.3 in July; private measurement said 47.7 and declining. Some European indicators appear to be bottoming. A couple of miles under water.
Here in the U.S., the president is still back from wherever and delivered his second of five planned speeches on the economy. Five pages of text. The word “job” or its plural 49 times. Forty-nine.
He means well, but has no idea how entrepreneurs think, take risks or work. He is a professor of constitutional law and likes laws. A first-class merchant of rules.
The president has become entangled in the Fed, a bad place to be active. Markets have assumed all year that Janet Yellen would replace Bernanke. She is smart, tough, experienced at the institution, speaks clearly when she has something to say, otherwise quiet, and has been free of any internal or external controversy. A careful, politic person.
Donald Kohn has surfaced as one of three finalists, and he has all the same qualities as Yellen. However, Kohn is 70, and carries Greenspan and “bubble” baggage.
Meanwhile, Larry Summers has campaigned for the job, an elbowing without precedent. He is brilliant, abrasive and impolitic. He would be the first Democrat to take the chair since Paul Volcker (mull that for a moment or two). He wants the job so desperately that he’ll make any bargain with President Obama.
Summers is a pure Keynesian demand-sider, a notch more coherent than Krugman but with the same program: spend, borrow, spend and borrow. The absence of spending on “infrastructure and investments and stimulus” is of course Obama’s greatest frustration. Summers cannot enact spending at the Fed, but he would try.
Yesterday the president added unwelcome fuel in a visit to Capitol Hill. A Democratic congressman said Summers would be a “bad choice,” and Obama rushed to his defense. No way to know if that response indicates the president’s nomination leaning, or just his usual grave irritation with anyone who dares to disagree with him.
Summers would be a high-risk, high-reward choice, his personality maybe a good thing for the Fed, squelching idiots who’ve had too much to say in the last eight years.
However, Obama’s conducting this replacement decision in public and months too soon is unsettling to markets at a bad time, especially as it reminds them that the economy is not this president’s area of strength. For three-and-a-half more years.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
