The Federal Reserve Open Market Committee also announced another one quarter percent rate drop, bringing the Prime Rate to 5 percent. Its press release said that “…economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. (But) The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time...”
This qualifier has convinced most economists that the Fed might now pause to see if the economy does improve. The April unemployment report was not as bad as predicted. The jobless rate actually dropped back to 5 percent from 5.1 percent and just 20,000 payroll jobs were lots, versus the expected 80,000.
And inflation is not exploding in spite of soaring gas and food prices, which now take up 17 percent of household incomes (versus 10 percent in past years). In fact, some inflation is good since rising prices are a sign of a rising demand for goods and services (and short supplies). The economy has grown a healthy 2.5 percent over the past 12 months, even after inflation is factored in.
One reason for the continued economic growth is that the Federal Reserve has been printing lots of money. The money supply has been increasing 12 percent over the past year, and a measure of the current money supply—MZM—increased a whopping 30 percent over the past 2 months thanks to the various stimulus packages from the Fed and federal government.
This doesn’t mean we are completely out of the woods, since real estate subtracted 1.2 percent from Q1 growth. March existing-home sales fell 2 percent with the national median price down 7.7 percent to $207,000 and for sale inventories at a 9.9-month supply.
Other economic indicators show flat growth as well, making this a very feeble recession at best.
LEADING INDICATORS—The Conference Board’s March Index of Leading Indicators (LEI) grew slightly, after 5 consecutive monthly declines. Five of its ten indicators showed growth, which means it is essentially flat growth.
MANUFACTURING—The Institute of Supply Managers’ March index was also unchanged at 48 percent, another flat indicator. But suppliers’ prices are soaring, which could crimp further growth in exports.
We will reach a bottom in home sales when prices no longer decline. In fact, a February price index by the government’s OFHEO of same home sales with conforming loan amounts actually rose 0.6 percent. But the Case-Shiller index for same-home sales in 20 cities that covers homes with jumbo loans as well fell another 3 percent in February and is down 12.7 percent in a year. This shows that the credit crunch is mostly affecting higher-end homes that require jumbo loan financing. Those home prices requiring conventional, conforming mortgage amounts to $417,000 for a single unit seem to be holding their own.
© Harlan Green 2008