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RATES INCH UP:

Dismal economic report a boon for borrowers

Mike Larson, mortgage writer, Bankrate.com  

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 tax rebates.

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 chains.

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.

 

-- Posted: Aug. 9, 2001
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