The yield curve has inverted again, raising fears anew that a recession may be in the cards after all (or is that just another reverberation from the global savings glut that Fed Chariman Bernanke likes to talk about?) In any case, the 10-year Treasury’s yield of 4.56% in mid-morning was trading below the 2-year’s 4.61%. The inversion is all the more striking coming after last week’s batch of economic releases that suggested that the economy was still growing at a healthy clip in spite of the surprisingly low rate of growth posted in the first estimate of fourth-quarter GDP.
But if the bond market is now convinced that the economy will slow, or worse, there’s still a dose of mixed messages rolling about from yesterday’s and today’s statistical updates to keep the pundits guessing.
Let’s start with the International Council of Shopping Centers (ICSG) retail sales index for the week through February 4. Advancing 2% over the previous week, the measure posts its strongest growth in more than a month. Granted, one week a trend doesn’t make, but for what it’s worth the rebound found some bullish sympathy with the 3.3% rise in the Johnson Redbook Retail Sales Index for the week ended February 4.
Whatever optimism springs from those weekly reports is muted by the news released yesterday from the Federal Reserve that consumer borrowing rose by a relatively light 3% in 2005. That’s the slowest pace since 1992.
Of course, that doesn’t necessarily mean that consumers are turning away from their beloved passion for borrowing. Joe Sixpack and his friends have been increasingly tapping home-equity loans to find the cash they need at prices they can afford. In theory, however, Joe’s willingness to supplement his borrowing from his house will fade as rates on home equity loans rise, a state of money pricing that the Fed is intent on pursuing until consumers cry a collective shout of “uncle.”
Assuming the Fed’s strategy to make Joe think twice about borrowing, the trend is expected to reduce consumer spending, and thereby slow economic growth. Of course, home equity borrowing could slow by way of falling real estate prices, a slide that would reduce the amount of equity available for tapping at any price. In either instance, the effect on the economy would presumably remain the same, namely, less consumer spending.
If fact, yesterday’s release of U.S. mortgage applications posted a decline for the week through February 3, according to the Mortgage Bankers Association. That’s the second week of decline. Perhaps that’s no surprise, considering that borrowing costs for 30-year fixed-rate mortgages has been rising, the yield curve inversion notwithstanding.
You can find whatever you’re looking for in the 21st century economy, and some of it might actually be enlightening.