More Bad News

Just yesterday, I said that unemployment increases tend to follow slowdowns in the manufacturing sector. Now today, the new unemployment figures are out and they are worse than expected (coming in at 445,000 instead of the anticipated 410,000 new jobless claims). In this case, these numbers are related to past slowness in the manufacturing sector; what yesterday’s news about drops in orders for both durable and non-durable goods means is that there’s likely more bad unemployment news to come.

Both pieces of news combine to make an interest rate cut by the Fed, perhaps even an inter-session cut, much more likely. But I’m not sure that more cuts will do much. Interest rates are already very low by historical standards–business don’t need to invest when they are not using, and do not expect to soon use, current capacity. That leaves the consumer sector, where interest rates primarily affect housing and car purchases. On Monday, General Motors rolled out 0% financing on most models, and Ford also stepped up its incentives. Others are likely to follow. But can this have a big effect? Zero-percent and other very attractive terms have been around for some time now, so these new deals might be expected to keep the industry about where it has been for the last two years, but are unlikely to provide a big lift.

And the same is true for housing: interest rates have been low for so long that the number of households in the market for a new house is unlikely to jump substantially in response to a mortgage rate decrease (the refinance business would benefit, however). Moreover, a Fed rate cut may not even affect mortgage rates, as they are driven in large part by expectations of future inflation. What makes people expect future inflation? Large federal deficits are one important factor.