The economic outlook was neither improved nor clarified by today’s’ economic reports.  The unexpected decline in durable goods orders (-1.7%) and shipments (-2.8%) and the 0.5% rise in inventories from January is unambiguously bad news because it suggests increased reluctance to make major purchases.  But this data is often substantially revised.  Wait for confirmation in a month before you act on it.

New home sales fell to an annual rate of 590,000 from 601,000 in January but January sales were initially reported to be 588,000. Bad news is actually good news here.  Homebuilders finally have regained control of their market, stabilizing sales and substantially reducing the number of homes for sales that are under construction or completed. A few more months like this will permit homebuilders to match a pick up in home demand with increased starts.

Last week’s 82% surge in refinancing mortgage applications could have two meanings.  It could mean that homeowners were waiting for a dip in mortgage rates to get cash for
remodeling or other spending.  Or it could mean that millions of homeowners are desperately trying to get out from under mortgages that they can not afford. The latter is more likely and suggests that the burden of the subprime mortgage problem will linger into at least next year. This would not keep economic growth from rebounding from the current 0.0% pace but it will prevent an easy return to the 3.0% average growth pace.

The situation in the oil market is bizarre and counter to what most people appear to believe.  It is not the refiners who have pushed up the price of oil.  It is OPEC production cuts, hoarding by speculators -yes, the same people who brought us the subprime problem – and violence in the oil fields. Yelling at refiners who are now subsidizing gasoline prices will not solve the problem. The silver lining here is that the recent drop in gasoline demand that created the bizarre situation will dominate other factors by midyear and bring prices down.

The comic opera invasion of the Bear Stearns lobby is ominous not because a few dozen zealots did this to get attention to their demand for a bailout of irresponsible mortgage borrowers but because the media reported their accusation of a Bear Stearns bailout without challenging it. Bear Steans ceased to exist and its owners lost 85-90% of their investment. Is this a bailout? Certainty the FRB could have handled this better to avoid the impression of a bailout of the investment bank.  Actually, people with mortgage problems got bailed out because the FRB guaranteed up to $30 billion of bad bonds, mostly mortgage backed. This action makes capital available to carry or convert defaulting mortgages.  Short-term the Bear Stearns action is positive for spending and economic growth.  Longer-term is very different.  Are the financially responsible people now obliged to cover the losses of financially irresponsible people?  There is not enough money to do this. Also, the FRB has committed a large share of its capital to covering the subprime losses. It does not have much ammunition left for other problems. It is overextended.  Consider what would have happened last August had the FRB been powerless to cope with the first round of the credit crunch.

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03/26/2008 - posted by L. Bancroft

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11/06 - Contractors cut 62,000 more jobs in October, mostly for nonresidential building work

11/03 - Federal highway funding still “temporary”

11/02 - Housing gets another boost from Washington

10/30 - Initial jump in GDP growth will ebb

10/29 - Two cities illustrate divergence in regional economic growth

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