Mortgage Pros, Inc.

Last week was a bit paradoxical. We got our first look at the Gross Domestic Product data for the third quarter, and it showed an apparently strong annualized growth rate of 3.5 percent. Yet the growth-sensitive sectors of the financial markets took a nose dive, with U.S. stocks falling 4 percent, foreign stocks down 3.8 percent, and real estate investment trusts down 3.2 percent. In classic flight-to-quality mode, Treasury and MBS prices rose smartly across the board. “Why the disconnect?” wondered this perplexed author.
Knowing that the ancient Greeks were the wisest of philosophers, I naturally turned to them for insight. Writing for his son, Aristotle had this to say on the matter,
“For one swallow does not make a spring, nor does one day; and so too one day, or a short time, does not make a man blessed and happy.”
Aristotle held that happiness isn’t a transitory feeling experienced over a limited period, but instead the cultivation of virtue and accomplishment over a lifetime. As such, he held that you couldn’t really know whether a person’s life was happy until some time after their death, because this judgment depends on whether their life’s works endure, how their children’s lives fare, and so forth.
In our day, the National Bureau of Economic Research (NBER) follows Aristotle’s approach in determining the beginning and end of an economic cycle. The economy peaked and the current recession officially began in December 2007, but the NBER didn’t judge this publicly until eleven months later. It may be that some time next spring, the NBER will declare 6/30/2009 to have been the end of the current recession, with the U.S. resuming a growth trajectory at that point. But in three of the previous four recessions, the economy experienced a quarterly blip of positive growth followed by at least one more negative reading before the recession was finally over. We won’t really know where we are now until the dust has settled in six to nine months.
Part of the discussion around third quarter GDP is that when economists break down the components of that +3.5 percent, nearly all of it was due to temporary government stimulus: the Cash-for-Clunkers program (which is now over), and the first time homebuyer tax credit expiring at the end of this month. Had it not been for large doses of government support, the economy probably would have shown net growth close to the zero mark in the quarter. The good news is that there is still a fair amount of spending to be done under the American Recovery and Reinvestment Act, Obama’s big stimulus package enacted in February. At the time the bill was being debated, it came under criticism on the grounds that the stimulus wasn’t front-loaded enough, with some of the spending being spread out over eighteen months to two years. Now the markets are hoping there’s still enough unspent money in the package to keep GDP in positive territory long enough for the economy’s underlying fundamentals to bob upward and sustain growth once the stimulus spending tapers off.
For the coming week, we have some more big economic news items on the calendar. On Tuesday and Wednesday, the Federal Reserve meets to deliberate monetary policy. All expectations are that the short term interest rate target will remain in the 0 percent to 0.25 percent range. The key question will be whether the phrase “extended period” remains in the Fed’s statement, describing how long it expects to maintain interest rates at such exceptionally low levels. On this phrase hinges the question of whether the Fed plans to begin tightening the money supply in early 2010.
Also this week, we will see the Employment Report. It is expected to show a reduction of 175,000 in non-farm payroll jobs for October, which would actually be an improvement over the loss of 263,000 in September. Although it’s dismal to think that October will mark the 22nd straight month of job losses, the good news is that the rate of job loss has been shrinking steadily since it peaked in January. The unemployment rate is expected to rise yet again to 9.9 percent, but keep in mind that employment is a lagging indicator on both the upside and the downside, so it’s normal for employment to keep skidding downward even as the rest of the economy is showing signs of early-stage recovery.

This entry was posted on Monday, November 2nd, 2009 at 5:21 pm and is filed under MORTGAGE NEWS, THE FED. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.