Friday, August 22, 2003

The Conference Board reports today that everything is still coming up roses for the US economy.
A widely followed measure of U.S. economic activity rose in July for the fourth consecutive month, providing another sign that the pace of the recovery is picking up.

The Conference Board, an independent New York business research group, said its gauge of leading economic indicators rose 0.4 percent last month, to 112.5 percent, compared with a 0.3 percent increase in June. . . .

Goldstein and other economists attributed the improved business conditions primarily to tax rebate checks, an increase in military spending and low interest rates that have been a catalyst to the home-buying boom.
Of the ten components of the leading indicators index, five were in a positive direction. However, the two that really matter, making up together over 60% of the total index, are interest rates and the money supply.

After running negative or turning in miniscule positive contributions all year, the interest rate spread (10-year minus federal funds) jumped remarkably in July. Clearly the Conference Board assumes that rising interest rates mean a growing economy in the future, but as the General has argued, rising long-term interest rates are clearly a mixed bag, at least as negative as positive. In particular, the rise in the ten-year has been driven as much by the collapse of the refinancing boom as by expectations that the economy will turn around.

The other big contributor is the money supply; the Conference Board uses M2. This has been a big contributor all year as M2 has been swelling well beyond the pace of economci growth. In fact, M2 is up over 8% since July 2002 and up over 12% annualized since April. Is this a sign of good times to come or a credit bubble? As Doug Noland at the Prudent Bear said recently,
We face these days a fundamental problem: our Credit system is already extremely unstable, owing to unprecedented mortgage debt growth. Destabilizing consequences include the explosion in mortgage-related securities, financial leveraging and (trend-reinforcing) derivative hedging. Furthermore, housing inflation has been excessive for years, with boom-time conditions only sustained by massive Credit growth. And, finally, it is simply difficult to envision how manic buyers� enthusiasm can be sustained for too long in this post-bond Bubble rate environment.
Apart from these two numbers, there really isn't much good news to report from the Conference Board. The other Big Number, average weekly manufacturing hours (which together with interest rates and the money supply make up a full 81% of the leading indicators index), fell again in July.

So interest rates are rising and the Fed is churning out money like there's no tomorrow. Celebrate!


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