Rate Watch #731 Rates Very Low. GDP to Fall in Current Quarter.
|CONFORMING LOAN PRODUCTS (Loans less than $417,000)|
|30 Year Fixed conforming|
|15 Year Fixed Conforming|
|JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)|
|30 Year Fixed Stimulus|
|15 Year Fixed Stimulus||4.125%||0||
* conforming loan limits for 2010 are:
1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950
Note that the above table now means something different than it used to. "Conforming" now means "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county.) You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.
You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by, but not limited to, the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining, and cash out (if refinancing).
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Core CPI was +0.2% - higher than previous and consensus. Since the talk lately has been of the dangers of deflation that little bit of data is going to be parsed to death. Overall CPI was -0.1%. Net TIC (a net measure of which way capital is flowing across out border) fell to $35.4 billion. Core PPI was +0.1%, overall PPI was -0.5%. Initial Jobless Claims were down to 429,000 - better than consensus and previous. Industrial Production was +0.1% and Capacity Utilization was 74.1%. Retail Sales (ex-auto) for June was -0.1%. Overall was -0.5%. This is coming after a May which saw a -1.1% overall drop in Retail Sales. In May the U.S. Trade deficit grew by 4.8%. Larger Trade Deficit means lower GDP. Since the trade gap increased 4.8% in May and where do you think GDP is headed? Recall that GDP = C+G+I+(X-M). C is consumer spending and (X-M) is the trade surplus. The chances of a drop in GDP in 3rdQ010 have increased.
III) The Technicals
The technicals are strange. We were headed for a bearish daily taking the weekly bearish but the higher than expected Trade Deficit Tuesday and the drop in Consumer Sales on Wednesday were ominous and caused more Treasury buying. What we are seeing since Wednesday is technically unexpected and has created a nasty technical which will likely cause serious selling (lower prices, higher yields) in the coming week.
For those who are not longtime readers, the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.
The fundamentals are clearly showing that a drop in 3rdQ2010 GDP is probable. This will be a heavy psychological blow to consumers and investors and make folks even less willing to spend and invest. I don't see this as portending a disaster but perhaps a period of extended very slow economic growth. A likely scenario is that we have GDP contraction in 3rdQ2010 and that this contraction will not be as severe as the previous but may last longer.
Data is in place which should create concern that we will see a dip in GDP in the current quarter. Since the quarter just started a couple of weeks ago it is not as if it is a foregone conclusion but it makes sense to look at the data, ask what it implies and then ask if there is anything to do about those implications.
Is there something which really offers a best forecast regarding 3rdQ2010 GDP? Is there something better that the traditional Leading Economic Indicators? I belive so. This report from Consumer Metrics Institute is the source of the concern expressed here. Consumer Metrics Institute looks at the consumer economy and the reporting lags real-time by only several days making it a much better leading indicator than BEA (Bureau of Economic Analysis - part of the Commerce Department). On June 25 BEA revised its estimate for 1stQ2010 GDP down to +2.7%. Consumer Metrics had forecast 1stQ2010 as +2.62% on November 30, 2009. Consumer Metrics is doing a much better job of forecasting where the economy is going than BEA largely because it has modern methods.
There is an excellent interview with Rick Davis, President of Consumer Metrics in which he explains, in detail, that his method of collecting economic data is vastly different from BEA's and has taken into account the way commerce happens now. An example he gives is music sales. If you wanted to track music sales in the past you may have gone to retail record stores or looked at shipments to retail record stores. Now there is no substantial supply chain or inventory for music. The important source (in terms of it being an economic indicator) is iTunes and what the customer did yesterday. Consumer Metrics looks to places such as that for leading data.
Instead of looking at "old school" indicators such as Industrial Production or Capacity Utilization, Consumer Metrics does its analysis at the retail level. Rick Davis has done for economics what Bill James did for baseball. Bill James devised new statistical ways of looking at baseball. Maybe we need a Billy Beane-like person who can put Davis' ideas into practice in the same manner as Beane actualized James' notions as GM of the Oakland A's.
I would suspect that this week's call by the Fed for slower growth is based, at least in part, on Consumer Metrics analysis.
The troubling graph is this one: The blue line is Consumer Metrics. The pink line is BEA.
So the question is: what should we be doing about this? Politicians and media-connected commentators will be arguing Keynesian spending vs. fiscal sustainability. My own view is that the stimulus of last year was not a long-term stimulus plan but a short-term one and if the long-term pop to the economy was approximately zero then we probably do not need more of the same. We need to face the fact that we are going to have a prolonged recession and that our plans should be how to improve the economy in the long run by, for example, tax credits which reward job creation. We also need to face the fact that many state and local governments are is serious financial positions because they have been too generous with public sector pensions. Calling pouring money into state and local governments to help them cover their shortfalls is not my idea of stimulus.
I understand that politicians need to say whatever they need to say to get elected/reelected but suggesting that the stimulus created or saved 3,000,000 jobs in a month when the civilian labor force decreased by more than 600,000 because so many folks gave up looking for a job misses the point. Certainly that deficit spending created or saved some jobs but it was concentrated on the short-term and that is the mistake. What should be done is long-term stimulus. If politicians are making decisions based on what will get them reelected then they will only think short-term.
If we measure the macroeconomic effects of fiscal decisions by thinking short-term them we are screwed. Keynesian spending is supposed to go to infrastructure building.
What the economy needs is not increased taxes or another stimulus bill like the last one. Economist Lacy Hunt estimates that every $1 of increased taxes reduces GDP by $3. Economist Steve Hanke suggests that the stimulus also had a multiplier of 1.0 or slightly less. That means that whatever the government spent on stimulus (the "G" in C+G+I+(X-M) )will go down the drain and GDP go back to where it was pre-stimulus. The latent effect of the stimulus will be the amount of future interest paid to service that part of the nation's debt. We will be left with the same sized economy having to sustain much more debt. At that point Keynesian notions will require serious revision. My view is that academic economists are rendered myopic by the political beliefs of their peers. They see Keynesian theory as gospel and supply-side economics as some drivel because of the associated political calculus.
What we need is investment tax credits for the industries of the future and we must do these absent any sociopolitical agenda. Suggesting that what we must invest in is "green jobs" is plain dumb. We need jobs whatever their color may be and we need fiscal policy which stimulates GDP. I am not criticizing the notion of "green jobs" but I most definitely believe that we cannot expect the economy to be a slave to our social agenda. It serves well to recall that the largest single cause of the mortgage mess was HUD's dictate to FNMA & FHLMC that if loosen its lending standards for reasons which were social. The consequences of making economic decisions based on a political or social agenda can be disastrous.
What we really need is to get politicians less involved in the details of the economy. We cannot do that today and this is not about replacing Democrats with Republicans which would accomplish nothing. In my view both parties are equally inept.
What we need to do is to encourage the public to understand that politicians do not create jobs and that folks should feel comfortable leaving the details of monetary policy in the hands of the Fed and move some of fiscal policy to a Fed-like entity which would set maximum deficits in the best interests of the economy. I am not making the case that all politicians are clueless. They are not. What is wrong is the expectation that the population has about what folks who are elected are capable of. What is needed is a gigantic shift to reality in the relationship between the public, politicians and the media. We need media which, in reporting about the economy, are politically neutral and encourage the public to understand that politicians have a limited role in shaping economic growth. It makes no sense to me to blame politicians when the voters expect them to mange the economy or create jobs. We need unelected people with a lot of technical knowledge running both monetary policy and guiding at least the deficit part of fiscal policy.
We are headed into a grim time for the economy and too few people are paying attention. Obfuscation of macroeconomic reality at present comes with a severe price simply because there is so much which needs to be done to restore its health and vigor.
If you have something to add to this discussion please post a comment on the blog.
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