Dismal economic report a boon for borrowers
Look out below!
On Aug. 8, the Federal Reserve Board released its
latest "Beige Book" economic report. The report is a collection
of anecdotes about retail sales, labor market conditions, bank practices
and other things that Fed underlings cull from around the country
and forward to policymakers eight times a year.
Officials consider the
report when determining interest rate policy, and the latest
one contained news that can only be described as terrible.
Bond yields cratered in the wake of the report's release
at 2 p.m. Wednesday because it signals that the economy is weaker
than many people thought. That may force the Fed to cut rates further
and sooner than expected. Because of the dramatic decline in yields,
mortgage rates could plunge over the next couple of days.
"Retail sales generally were sluggish and frequently
below expectations, despite substantial discounting on a wide range
of consumer goods. Manufacturing activity in nearly all sectors
and regions declined further in recent months as producers adjusted
to weak domestic and foreign demand and worked through accumulated
inventories," the report said.
"Sustained weakness in the manufacturing sector
spilled over to other businesses, with many (Fed) Districts indicating
declines in demand for office space and trucking and shipping services."
Bankrate.com collects rate data for its weekly benchmark
surveys every Wednesday. But because the Fed report came out late
in the day, any rate changes implemented as a result of the report
won't show up in the Aug. 8 survey. We felt it was particularly
important to point out that a significant drop in rates is likely
during the next couple of days, even if it may not be reflected
in the "official" numbers until next week.
Why is the Fed report so important? Many economists
have expressed concern that weakness in both high-tech and low-tech
manufacturing would spill over into the broader economy. But until
recently, they were cautiously optimistic that wouldn't happen due
to this year's drastic interest rate cuts, lower energy prices and
The Fed report, however, throws cold water on the
"half-full glass" argument. It says that many service
businesses, including law firms, temporary staffing agencies and
shippers, are now reporting weakness, as are airlines and hotel
If service-sector weakness gets bad enough so that
service businesses start firing workers to the same degree manufacturing
businesses have, it's big trouble for the U.S. economy. Recession
likely would be unavoidable because such firings would cause consumer
spending to dry up.
For mortgage hunters, though, the bad news should
lead to a significant interest rate break over the next few days.
Loan rates could continue heading lower over the next few weeks
if more bad news surfaces. And for the first time in months, I'm
starting to think that's a serious possibility.