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Strong Economy keeps housing woes to a minimum
Posted by: McQ on Sunday, September 02, 2007

Or so says the Labor Department's latest report (to be released next week):
Employers in the U.S. hired enough workers in August to keep the unemployment rate near a six-year low, helping the nation weather turmoil in housing and credit markets, economists project a report this week will show.

Employers added 109,000 workers to payrolls last month, following a gain of 92,000 in July, according to the median estimate in a Bloomberg News survey ahead of a Labor Department report Sept. 7. A private report Sept. 4 may show manufacturing continued to expand.

``The underlying fundamentals are sound and the economy continues to grind forward,'' said Carl Riccadonna, an economist at Deutsche Bank Securities in New York. Growing employment ``largely avoids the economy going into a steeper downturn.''

Job and wage growth may sustain consumer spending, which accounts for more than two-thirds of the economy, as home values fall and loans become more difficult to get. The figures are the first economy-wide reports since credit costs surged globally last month in the wake of subprime losses that prompted the Federal Reserve to lower a key interest rate.
And speaking of the credit markets:
Fed Chairman Ben S. Bernanke last week said the central bank would do what's needed to prevent the credit-market rout from undoing the six-year expansion.

The central bank ``continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,'' he said at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.

Bernanke said the Fed would ``pay particularly close attention to the timeliest indicators'' since data prior to August may not capture the credit turmoil. Futures contracts are pricing a certain cut in the benchmark federal funds rate at the central bank's policy meeting Sept. 18.
So you have to wonder if the worst of the 'crisis of confidence' in the credit markets has passed. Or has it? Obviously the housing market has indeed been adversely affected.
Harvard University economist Martin Feldstein, who heads the group that dates U.S. recessions, said Aug. 31 there is a ``significant risk'' of a contraction.

``Downturns in housing construction have almost always been followed by a downturn in the economy, by a recession,'' Feldstein said in an interview from Jackson Hole. ``My judgment is there is enough of a risk that the Federal Reserve should be responding to that risk'' by cutting interest rates.
[As an aside, part of a "group that dates U.S. recessions?" Boy that must be a fun night out. OK its Sunday and that weird sense of humor is kicking in again.]

So, agree or disagree? Should the Fed be cutting interest rates as Feldstein suggests? Or does Bernanke have it about right with his "we'll monitor the situation closely" routine while allowing a little self-healing and clean up to take place?
 
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Previous Comments to this Post 

Comments
Interest rates hikes, No, not necessarily. The Fed’s job is to fight inflation. Inflation generally has an 13-18 month lead time. What the Fed is doing today won’t be felt, or rather not felt, in over a year, if "core inflation" remains low.

There are ALWAYS folks who want lower interest rates. They will use any excuse to get them.

So just because someone SAYS the Fed should lower rates doesn’t make them really experts on lower rates. Not that these guys aren’t its just not obvious.
 
Written By: Joe
URL: http://
I watch this stuff everyday and all day, Bruce (I trade options), and I have to say that I just don’t know and I don’t think anyone does. Whether the Fed should, or not, if speaking purely in practicalities, assumes one expects it to make a difference one way or the other. We can safely assume they won’t raise the rate, but whether they hold or lower 25 basis points isn’t going to make much of a difference in my view in the medium to short term.

I only guess at these things, as that’s all anyone can really do. When I trade, I look at price and volume and try to ignore everything else.

My guess? I think the interest rate will hold. That’ll be a good excuse for the big boys to take the market down near the recent low a couple of weeks ago, scaring the little guys out of more shares cheap, and then we’ll be taking off for new highs later this year in a typical Santa Rally.

One piece of data I do watch is the Commitment of Traders report (COT), which gives the net positions in the stock index futures and commodity futures (the difference between long and short positions) and the commercials are at a record net long position of nearly $55 billion. When this correction began in early July, they were at a still very high net long position of 20 billion.

Of course the big boys can lose their asses too, but you wouldn’t normally expect to see them increasing their net longs in the midst of so much media panic.
 
Written By: Richard Nikoley
URL: http://www.uncsense.com
Joe is right. Their primary job is to stop inflation and secondarily keep us out of recession, etc. Also, realistically, how many people with ARMs are going to be saved by a quarter or half point?

For the housing sector as a whole, demand for housing is up or down? I am going to guess that during the boom, there was a lot of "artificial" demand from speculators flipping rentals in Florida etc., and now that that’s over, you see less demand as it reverts to the natural demand, but with a glut of supply for a while.

It is also interesting that the construction industry didn’t lose as many jobs as one would expect, because the people who lost jobs were illegals and just headed home or to different sectors.
 
Written By: Harun
URL: http://
"downturns in housing construction have almost always been followed by a downturn in the economy, by a recession"

This was too much speculator driven to be an accurate indicator this time.

In general I think there shouldn’t be hardly any bailout action overall in this. Rewarding bad behavior gives you more of the same. Next time it will be bigger and uglier.

And in general I’m tired of the economy being based off of purely having money or engaging in speculation. It feels like 1915 England around here. We’ve offshored what I consider the real substance of the economy and are making money simply because we have money. All it takes is one economic crash (England got two, the Great Depression and WWII) and we’re screwed for decades.
 
Written By: jpm100
URL: http://
We’ve offshored what I consider the real substance of the economy and are making money simply because we have money.

The real substance? Most modern business contains two fundamental elements: scalable and non-scalable (or, at least, relatively so). The genius of American productivity is that we export the non-scalable and drive the scalable to enormous efficiency.

It’s perhaps more risky than having your factory down the street where you can keep a close eye on it, but I have no doubt I’d accept the risk.
 
Written By: Richard Nikoley
URL: http://www.uncsense.com
Oops, that first paragraph should be block-quoted in my above entry.
 
Written By: Richard Nikoley
URL: http://www.uncsense.com
I have no idea what they should do with interest rates, but housing takes a long time to work out over pricing difficulties, and we are at best half way through it. With prices having much more to go than they already have.

For the most part people overestimate the power of the fed. They do not control interest rates, just those they set, as the persistence of low long term rates despite repeated fed attempts to raise them has shown. What they can do is help provide liquidity in short term market hiccups that freeze the credit markets. They can be the lender of last resort.

The problem, as long as it doesn’t become massive, is not the credit crunch or subprime. It is the end of the housing bubble. That has to lead to lower growth than we otherwise would see, unless the fed prints up so much money that the bubble reinflates, or some other bubble does. Exactly what is left to inflate? Everything is very high to a bubble themselves. It still leaves deflation of bubbles down the road anyway.


Furthermore, might the markets wake up to more money creation? Might that lead to higher rates as inflation fears rise? Eventually money creation leads to inflation.

There are too many variables for me to predict, but bubbles deflate or stagnate for long periods of time. Both paths have their risks. Neither is particularly attractive.
 
Written By: Lance
URL: www.asecondhandconjecture.com
They do not control interest rates,
Good point. The Fed can make it easier for banks to borrow money, but even if rates go back to the recent lows, people with poor credit are not going to get these low rates, market for sub-prime is gone, well, the market exists, but lenders are no longer going to cater to that market, so we are going to have a lot of foreclosures no matter what, but with lower rates, there will at least be more buyers and the potential to keep prices from dropping precipitously.

However, the Fed maybe thinking that we are going into a slowdown no matter what, and inflation risks are minimal, so they may drop rates in an effort to prevent a full fledged recession.

My speculation is several quarters of consistent rate reductions, until or unless inflation fears become more likely than recession.

Cap
 
Written By: Captin Sarcastic
URL: http://
There is such a disparity between interest rates in the Fed fund futures market and the actual Fed fund target rate, that a 25 basis point cut is highly likely. Nothing is certain with the Fed, but that is a pretty good bet.

I think the Fed has acted in a responsible manner to indicate it is not going to bail out Wall Street or even real estate speculators, yet it will act to prevent a widening crisis. So far, so good.
 
Written By: Kurt Brouwer
URL: http://www.fundmasteryblog.com
According to the Skeptical Optimist, deflation might be more of a worry now, and he suggests a rate hike will be forthcoming.
 
Written By: Harun
URL: http://
There is such a disparity between interest rates in the Fed fund futures market and the actual Fed fund target rate, that a 25 basis point cut is highly likely.
Actually, the fed’s rate is pretty meaningless on some of its targets, which are already well below their target. All the cut will do is ratify what has already happened.

Interest rates are controlled by the market, not the fed. The Fed can influence them, but it does not set them no matter how many times the chattering class of CNBC makes it sound as if they do.
 
Written By: Lance
URL: http://asecondhandconjecture.com

 
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