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July 30, 2003

Fed Upbeat Report Unconvincing

An optimistic "Beige Book" report from the Federal Reserve seems to indicate that economic prosperity is just around the corner.

But this UPI analysis thinks it's unconvincing because the core of the good numbers are still based on the Fed itself pumping up real estate activity with low interest rates:

If this sounds too good to be true, it is; it's a perpetual motion machine. It can work, by keeping spending and economic activity going during a mild downturn, if there is a quick resumption of genuinely productive economic activity. However, it is very dangerous if applied to a lengthy recession with structural problems, because it postpones the solution to the problems and eventually falls of its own weight, precipitating a second, deeper recession that is exacerbated by a collapse in the housing market and in consumers' financial position.

With home mortgage rates jumping upwards in the last week, the numbers in the Fed report, largely from June and early July, may already be out-of-date:

The result, the first inklings of which were announced Wednesday morning, has been to kill off the mortgage refinancing market, and cool substantially they home market itself.

If you look at where the bond market indicates things are going, it doesn't look like good news. Inflation-indexed Treasury bond yields are jumping as well, indicating "that the market is expecting, not an up-tick in inflation, which would indeed in some circumstances be indicative of a recovery in the economy, but a sharp increase in the real (inflation-adjusted) cost of borrowing." That means all economic activity will face heavier costs on capital and slow any potential growth.

Just one analysis, but with consumer confidence falling, it doesn't look good.

Posted by Nathan at July 30, 2003 05:35 PM