July 29, 2003

D---!

Bad news this morning about the U.S. business cycle:

Consumer confidence plunges - Jul. 29, 2003: The Conference Board, a business research group based in New York, said Tuesday that its closely watched index of consumer confidence fell to 76.6 from 83.5 in June. Economists, on average, expected confidence to rise to 85, according to a Reuters poll. The Conference Board's "expectations" index, which measures how consumers feel about the future, fell to 86.4 from 96.4 in June. The "present situation" index dropped to 61.9 from 64.2. "The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "Expectations are likely to remain weak until the job market becomes more favorable."...

Yeah. And the job market will not become more favorable until after expectations become strong. This is disappointing.

Posted by DeLong at July 29, 2003 09:30 AM | TrackBack

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Labor Shortages

Young Workers Fill Summer Shortages
by Steven Greenhouse
The New York Times, July 20, 2003, Page A24

This article reports on the inflow of foreign workers to fill low paying jobs in tourist areas. The headline of the article refers to "shortages." The information in the article makes it clear that there is no shortage of people to do the jobs in question. The business owners and managers quoted in the article indicate that they can get foreign workers to accept these jobs at lower wages than U.S. citizens. Insofar as there is a shortage of workers, it is due to the fact that these businesses are trying to hire workers at below the market wage.

from Dean Baker

http://www.tompaine.com/feature2.cfm/ID/8465

Posted by: bakho on July 29, 2003 10:15 AM

Usually I think I understand bond market movements, but this rise in 10 year treasury rates from 3.11 on June to 4.36 now is telling us the economy is fine and the next move by the Fed is to raise rates. I would like to believe it, but but but....

Again, a rise in interest rates this sharp may be a problem for the economy if conditions do not rapidly improve. The refinancing market should dry up quickly, variable mortgage rates will rise, corporate credit is more expensive.

Posted by: anne on July 29, 2003 10:29 AM

Anne has put her finger on the problem. There very well be a recovery in the works. But just as with Bush I, deficits make bond holders nervous and recovery more difficult.

Bakho also has a good point. Especially in areas like customer service/telephone sales and computer software, companies can cut their labor costs in half (or more) by outsourcing to India. Several million jobs are expected to move overseas in the next few years. Consumers have good reason to feel gloomy.

Unless, of course, the money they use for consumption comes from dividends and capital gains.

Posted by: Charles on July 29, 2003 10:36 AM

The reality is that consumer spending is nowhere near as volatile as the Conference Board and Michigan surveys. The press makes a big deal out of it, but these are very low powered indicators.

Posted by: JiminVirginia on July 29, 2003 10:37 AM

Following the points made by Charles, not only is India increasingly competitive with us in jobs, but so is China. My sense is that loss of jobs to China and India has been and will be far greater than loss of jobs to other coutnries in any other recovery from recession. Also, the sorts of jobs that are lost will often be those of skilled workers.

Every time I become optimistic about rapid GDP growth, I remember that capacity must now be considered globally. There is ample global capacity, so why should corporations need to significantly increase hiring in the near future? Little gain in the job market, may mean continued slow growth.

Posted by: anne on July 29, 2003 11:02 AM

http://www.morganstanley.com/GEFdata/digests/20030728-mon.html#anchor0

Stephen Roach -

After three tough quarters, the world’s major economies were overdue for a bounce. And now a quickening of undetermined magnitude and duration appears to be at hand. With leading indicators in the United States suggesting that the global growth engine may be about to shift gears, the rest of a US-centric world can’t be too far behind. The key question: Is this fillip in the global business cycle sustainable, or is it just the latest in a long string of temporary rebounds that will quickly fade? ...

Posted by: anne on July 29, 2003 11:03 AM

To tell the truth, I'm amazed consumer confidence remains as high as it is. It may be that we'll reach a tipping point at which point we'll see a substantial drop.

Or, perhaps, some of the more bullish economists have done a good job at keeping us from falling into a downward spiral.

Posted by: SZ on July 29, 2003 11:36 AM

To tell the truth, I'm amazed consumer confidence remains as high as it is. It may be that we'll reach a tipping point at which point we'll see a substantial drop.

Or, perhaps, some of the more bullish economists have done a good job at keeping us from falling into a downward spiral.

Posted by: SZ on July 29, 2003 11:39 AM

The Fed will be unlikely to raise rate at all in the next year and certainly not before the 2004 election.

Bond sellers are reacting to the need for the US to sell A LOT of bonds in order to cover the MASSIVE DEFICIT. I mean, a half a trillion worth of bonds in one year. Supply and demand says that price comes down (and yield goes up). This is independent of any Fed action.

Posted by: bakho on July 29, 2003 11:42 AM

I disagree with Anne's "this rise in 10 year treasury rates from 3.11 on June to 4.36 now is telling us the economy is fine and the next move by the Fed is to raise rates."

It seems to me that prospective bond buyers are looking ahead to the avalanche of debt that the govmt will be trying to sell to pay for the exploding deficit. Rates will have to rise because there will be more debt to sell than there will be buyers at current interest levels.

Posted by: claude tessier on July 29, 2003 11:42 AM

I agree, I agree!

The point is I am puzzled. The 10 year treasury is now at 4.4%. Is the reason the prospect of an economic boom, a sudden realization that we will accumulate $900 billion in federal debt this year and next, or suggestions from the Fed that there will be no direct purchase of long bonds?

Posted by: anne on July 29, 2003 12:09 PM

Anne, this commentary from bloomberg addresses the topic of your concern about interest rates. Interest rate spreads have historically been an excellent predictor of future economic activity. Anyway 10 yr rates were only in the low-mid 3's for a very short period of time, and anyone who refinanced already will benefit for years to come. I think variable rate mortgages are based on relatively short term rates, so that's up to the Fed. Also there's a lot of momentum trading which might cause the rates to bounce around. A negative surprise would undo this rate rise quickly, and then everyone could refinance to the same rate only delayed by a few months.

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_baum&sid=ao5hrEtedAg4

Posted by: snsterling on July 29, 2003 12:15 PM

Maybe foreign buyers are requiring a premium to take on the risks of further depreciation in the USD. After all, some of the same countries we are pressuring to let their currency rise (China, Japan) are large buyers of US securities.

On a semi-related note, today's WSJ has an article about a selloff in fannie&freddie bonds triggered by a report that the ECB is dropping them from its reserves and recommending that other central banks do the same.


Posted by: chris_a on July 29, 2003 12:25 PM

When I look back in my records, I find this bond sell-off very quick and very steep on a comparative basis. Robert Rubin always taught us to focus on bonds to read the other markets and the economy.

Posted by: anne on July 29, 2003 12:41 PM

Anne,

You have the answer. All you need to do is accept it. The classic determinants of interest rates - inflation and inflation expectations, growth and growth expectations, and the anticipated path of the fiscal balance, are on the list. Stick to them. Inflation expectations remain low, so Treasury yields are historically low. Supply and demand factors (the Treasuries issuance plans and the Fed's purchase plans) have skittered around in unanticipated ways, but the response in Treasury rates has been what you would expect. Growth prospects seem to be improving, but that remains uncertain. Again, that is reason for rates to rise from a several decade low, but to remain low by historical standards. Toss what has probably been a very large mortgage portfolio hedge adjustment - selling Treasuries as the risk of mortgage prepayment diminishes - and you have further reason for rates to have risen fast (just as mortgage hedging quickened the drop in May). The one thing left to do is tease out short from long-term factors. Mortgage hedging is a short-term phenomenon. It causes greater volatility in Treasury rates, but doesn't have much to do with Treasury rates over the long haul. Changed expectations of Fed purchases of Treasury coupons should be a short-term issue, as long as all goes well. Together, these latter two factors help explain the up-and-down since early May. Set them aside, and note that ten-year rates are just about where they were a year ago, but headed the other direction. Rates are ot high, but certainly indicating expectations of more issuance and faster growth ahead.

Posted by: K Harris on July 29, 2003 01:34 PM

" . . .a rise in interest rates this sharp may be a problem for the economy if conditions do not rapidly improve. The refinancing market should dry up quickly, variable mortgage rates will rise . . . "

I know very little about economics, but I have a question about the rise in interest rates (for whatever reason) and housing prices. It seems obvious that a large factor in the continuing rise in real estate prices is the low interest rates allowing people to afford to pay more for their homes. Many people have taken advantage of this to take at least some of the equity out of their homes and convert it to cash with home equity loans. So, if the rate goes up wouldn't that have a negative impact on housing prices across the nation, especially with the job market being so soft (contrary to the conventially thinking that housing prices are a regional issue)? That drop would cause recent home buyers and those who took their equity out to actually have negative equity in their homes. What effect would this and continuing softness in the job market have on Freddie Mac and Fannie Mac? I'm making an unsupported assumption that many of the people with negative equity in their homes would be the very people living close enough to the edge financially to be more likely than average to default on the loans. And, with the savings rate of Americans being so low, that would seem to exacerbate this problem.

To an un-educated (in economics) person like myself, this seems like a situation with some pretty strong dangers inherent to it (even assuming, as I guess I do, that the Macs are in absolutely no danger of truly catastrophic problems). Or is it just my ignorance connecting dots where there are no connections?

Posted by: BriVT on July 29, 2003 04:26 PM

K Harris

Excellent.
Sometimes I forget how to think.

Anne

Posted by: anne on July 30, 2003 08:31 AM
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