No one needs reminding that the housing market is softening; the data are doing just fine with that task, thank you very much. Nonetheless, Fed Chairman Ben Bernanke yesterday decided that the masses needed reminding, and he made his point clearly. Whether it was a productive point is debatable.
This much, at least, is clear, Bernanke told us: the housing market is now in “substantial correction,” and the result will be a drop in U.S. economic growth by around one percentage point in the second half of this year, reported USA Today. The effect will “probably” linger next year, taking a toll on growth in 2007, he added.
The message was clear enough. Or, so one might think. In fact, nothing’s what it seems these days when it comes to reading the economic tea leaves of numbers and commentary.
Equity traders listened to Bernanke speak and found reason to buy, driving stocks up. The S&P 500 delivered a robust 1.2% gain yesterday, one of its better days in recent memory. The bond market, meanwhile, was inspired to again drive the yield on the 10-year Treasury lower, to 4.565% by the close.
The fixed-income set heard Bernanke and took the hint by deciding that another rate hike looks unlikely. Holding Fed funds steady seems the path of least resistance for the moment, although some are talking about the prospect of a rate cut in the near future. All of which stirred bond traders to buy, and thereby lower the 10-year’s yield.
The stock market too found reason to cheer at the notion that the odds of another rate hike further receded into the financial woodwork. And, yes, chatter about a rate cut was present in the equity realm too, producing a giddy session yesterday that stirred some to visions of financial sugar plums.
In sum, the stock market offers a crisp counterpoint to the bond market. The former thinks the future economic scenario will favor equities, which is to say, growth. The bond market begs to differ. How long can this go on? Perhaps longer than reasonable minds think possible.
In the meantime, Bernanke’s outlook for a slowing economy is complicated by the fact that inflation remains higher than the Fed would prefer. Indeed, Bernanke said as much yesterday, explaining that inflation remains “above what we would consider price stability.”
Everywhere, it seems, there is a dualism, offering this on one hand, and that on the other. On Monday, we learned that construction spending last month bounced back unexpectedly. On the same day, however, news broke that manufacturing’s pace of growth continued to slow. The tea leaves turned even more ambiguous yesterday with the report that orders for manufactured goods in August were flat.
Meanwhile, this morning we learned that the labor market continues to hold up rather impressively. The number of people filing for new jobless claims fell to 302,000 last week–the lowest since July, and 20% below the year-earlier tally.
The data’s telling us many things, but that’s not making the job of predicting what comes next any easier.


  1. kharris

    “…the labor market continues to hold up rather impressively…”
    Claims holding up impressively, I get. The labor market in general? Hiring has slowed substantially from last year’s pace, and it was never strong in this cycle when compared to the best performance in prior cycles. What is impressing you about the labor market now?

  2. Jim Picerno

    Perhaps the ability to be impressed depends on what you’re expecting.
    I’m impressed relative to what I’ve been told is coming: an economic slowdown and perhaps even recession. Yes, it’s true the labor market hasn’t been producing jobs at a pace that’s comparable to decades past. On the other hand, we’re still a long way off from losing 200,000 to 300,000 jobs a month, as we did during the peak losses in 2001-02 and 1991-92. That may be coming, but so far we’re still producing jobs.
    In August, the Labor Dept reported that 128,000 net nonfarm jobs were created, up from 121,000 the month before. Right you are that we’ve had better months, materially better. But we’ve also had worse. The monthly average since January 2004 stands at 163,000. Yes, we’re below that, but you don’t get recessions when 100,000-plus new jobs are coming on line each month. Granted, you don’t get booms either with those numbers. If the pace keeps up, what you get is a soft landing. Maybe.

  3. Bill Conerly

    For investment markets, the clear signal is that inflation is not going to be as bad as we previously thought. That explains equity prices up, bond prices up, and real estate prices down. (Real estate is the best inflation hedge around.) Stock and bond markets are not so isolated from one another that they can hold widely differing views of the outlook.

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