Barron's6/19/00:Dr. Al's Monetary Ritalin Has Yet to Calm the Economy.
JUNE 19, 2000
Dr. Al's Monetary Ritalin Has Yet to Calm the Economy
By Gene Epstein
Has Dr. Al really managed to administer enough monetary
Ritalin to this hyperactive economy to truly slow it down?
Or is the patient merely grabbing a quick nap before planning even more mischief?
Well, rumors about the death of this economic boom seem greatly exaggerated.
Despite the recent rise in the rate of unemployment, joblessness should continue to fall,
and the Fed chairman's cherished "pool of available workers" along with it.
And despite the recent decline in retail sales, the consumer's fattening paycheck
should soon bring him back to the stores big time.
Moreover,
with stronger economies abroad now fueling a surge in U.S. exports,
and with state and local governments spending huge chunks of their accumulated
surpluses on public works, 2000 should go down in the record books as the fifth year
in a row of better than 4% growth in gross domestic product, a streak that has never
been surpassed. So whether or not Mr. Greenspan truly believes he's finished his work,
he'll soon find out there's more to be done.
He may well stay his hand at the Federal Open Market Committee meeting
scheduled for the end of this month,
But
by the August 22 conclave, he should find sufficient evidence
to warrant yet another 50-basis point hike in the fed-funds rate,
from the current 6 1/2 % target to 7%.
(He's likely to go as much as half-a-point by August because the next FOMC gathering
will be held October 3, too close to the presidential election to do anything so aggressive
as hiking fed funds.)
Let's take the first head-fake in the economic data: the recent decline in retail sales,
which helped spark a rally last week in stock prices.
The Commerce Department reported that sales fell 0.3% in May, and with the
downward revisions to March and April, inflation-adjusted sales fell at an annual
rate of 1.2% over the three-month period. But May sales were still up 5.6% from the like month a year ago.
And as economist Jason Benderly points out, short-term patterns can oscillate wildly
around the long-term trend. For example, in mid-'97, the three-month trend plunged nearly 4%,
only to snap back to a positive growth rate of 15% a few months later.
And the recent decline is also coming off a peak of 15% as January.
All one can discern is that the shopping public has a pronounced tendency
to loot the malls and showrooms for a concentrated period and then retrench in the next.
But wage and salary growth was running at an 8 1/2 % annual rate in the first four months of this year
, much too strong for us to doubt that we're witnessing a retrenchment period and that
the shoppers will soon return for another spree. Then there's the recent
back-up of the unemployment rate, to 4.1% in May from April's 3.9%,
plus the shocking news that last month the private sector shed more than 120,000 workers.
But this decline is likely to prove a one-time event, especially since it was muddied
by the bizarre fact that in that same month, the Census Bureau hired
nearly 360,000 temporary people, many of whom might have worked in the private sector
if Census hadn't lured them away.
Moreover, every other labor-market indicator is screaming that the labor market
is extremely tight: unemployment insurance claims, the Help-Wanted Index
and the consumer-confidence measure of jobs -- hard-to-get.
And at this stage of the boom, if past patterns are any guide, employers generally find
they're understaffed in relation to the volume they're doing. So they're eager both to hire more workers
and to hoard the ones they have.
Finally, the current insensitivity of the interest-rate sensitive sectors of the economy
provides us with a sure sign that the fed funds medicine is not yet having the desired effect.
Start with autos, which are generally bought on credit.
In the first five months of this year, unit sales of new cars and light trucks were running 8.1%
above the same period a year ago, and the more recent April-May average was also running higher.
In fact, auto-loan rates peaked in the early part of this year and have since declined.
And whatever rate shoppers are paying for those other consumer durables,
furniture and appliances, sales of those items are also running higher than a year ago.
Of course, the big enchilada of interest-rate sectors is housing,
and the way the script is generally written, rate hikes are supposed to punish this sector
the most severely, with spillover effects on the rest of the economy.
But while there are no longer any signs of growth in this sector, there are few signs of weakness.
True, based on the most recent data available, sales of new and existing homes were
down 5.8% from a year ago in the first four months of this year.
But the Mortgage Bankers Association index of mortgage applications has recently surged to a
record high, which means sales will likely go gangbusters over the next few months.
Housing starts have about matched the pattern of a year ago,
and sales of new homes are actually running higher.
Underlying all this is a race between rising mortgage interest rates and rising incomes.
Benderly calculates that a 1% increase in the mortgage rate brings a 5%-6% cut in home buying.
But on the other hand, the purchase of homes rises by 5%-6% with a 1% increase in incomes.
And with incomes rising, the housing market is hovering around its plateau.
Now take another standard rule-of-thumb:
Fed policy normally gets one-for-two, meaning that
a hike in the fed-funds rate of 2% slows GDP growth by 1% about a year later.
Well, over the past year, the funds rate has gone up by 1 3/4 %, so we might begin to
see some effects. And maybe we have: Perhaps the torrid rates of growth of the
fourth and first quarters would have been even greater if the monetary tightening hadn't happened.
But Dr. Al knows he must do better than that, and he no doubt soon will.
When I poked fun last week at the benighted Fed officer who thought that Treasury surpluses
are shrinking the money supply,
I received a firestorm of protest from readers who thought the joke was on me.
Austrian-school economist Frank Shostak even sent me a long quote from the great Ludwig von Mises,
which stated that surpluses do indeed deplete money.
But Mises was assuming what must have been the standard practice in his day.
If a government takes in more than it spends and then hoards the surplus against a rainy day,
surplus does indeed reduce the stock of money in private hands, at least temporarily.
But that isn't at all what the U.S. Treasury is currently doing.
It pumps its surplus right back into the economy.
To some extent it's bought bonds in the market, but for the most part it simply pays down a portion of
maturing debt at each Treasury auction. Bondholders receive cash, which they can spend or reinvest.
The confusion arises because the Treasury actually has an account at the Federal Reserve
against which it writes all its checks. (Sort of like the rest of us, except you might have noticed
that your refund check from the IRS was written against the central bank instead of one on the periphery.)
Now, if it allowed the balance in that account to build up as the surpluses poured in,
it would indeed be extinguishing money.
But that's exactly what it consciously avoids doing.
For quite a while now, it's been maintaining a balance of a mere $5 billion,
and doesn't permit that sum to go above that level for very long.
If it does have extra cash on hand, then it places that money in commercial banks,
in what are known as Treasury tax and loan accounts.
And of course, those deposits can be used by the banks to make short-term loans to their customers.
And the rare times the Treasury's balance at the Fed rises unexpectedly,
the central bank routinely offsets that drain on bank reserves through its open-market operations.
Finally, those readers lucky enough to have never taken a Principles of Economics course wondered
what I had in mind when I spoke of the mind-rot on the topic of monetary policy put out by the standard textbooks.
Here's this from Harvard economist N. Gregory Mankiw's bestselling Principles of Economics:
"Decisions by policy-makers concerning the money supply constitute monetary policy."
Well, no.
The topic of the money supply rarely, if ever, comes up
when the Federal Open Market Committee huddles.
====================================
Message 13896754
To: American Spirit who wrote (54355)
From: Tunica Albuginea Friday, Jun 16, 2000 3:52 PM ET
Reply # of 54478
American Spirit let's get real here. We have The Biggest Bull
in history. You think that Alan is going to soft land it? Come on now.
Every time little Al even so much as hints at raising rates
Da Bull snorts, has a big laugh, does a little jig on
the spot and off he rashes to a new high.
What makes you think that Da Bull is going to take seriously
anything that little Al does?
I'll tell you what:
We need Big Medicine here.
What we have is a veritable African Buffalo.
What we need is a nice double barrel side by side
Rigby in 700 Nitro Express and put one right through the
the forehead at close range.
Nothing else will do.
And after that just wait a little to make sure
it is dead: African buffaloes are known to get up and
charge you after being down
:-)
TA
Message #54355 from American Spirit at Jun 16, 2000 1:55 AM ET
Naz not in trouble. Just a lousy news week. But the tech revolution is still galloping foward. A little market malaise is going to stop it? There's a lot of re-positioning going on for the next leg of wireless. Everything from huge mergers to cable roll-out - satellite launching - Palm type devices and internet telephony - cables being laid out under oceans - faster and more intelligent chips being built etc. etc. It's just hard to see the level of progress when you're in the middle of it.
The market is in a bad mood now. SEC crackdown on amfia shop. QCOM and Globalstar getting criticized. Internet dot.coms being in financial trouble. MSFT trial. etc.
But the computer net revolution is booming. So I buy what I consider undervalued stocks like IBM, COMS, QCOM (at 61), GTE, CPQ, AAPL, UIS, LU and T. I also buy LOR which has been a loser for me so far but watch out. Down to book value. Try to catch it at the bottom and sock it away.
CPQ has been weak lately for instance but someone just bought a one billion share block today. Maybe the Saudi Prince again. Remember when AAPL was at 20? Same thing happened. Any of the above stocks could double in a year IMHO. Though 20% is fine with me for now. ggg
QCOm got hit by a short gang today led by TheStreet.COm. They are all shorts over there and are obvious about it. Three negative articles on QCOM in one day. That's almost spamming. QCOM will come right back once they cover.
So what's going to pick the market up? Just another week. A better news week. |
