Randomly Noted

If current economic patterns continue to hold sway in the U.S., all sorts of unusual relationships will influence a  variety of investment decisions.

Consider an economy growing at 2% or less, but growing. That seems a reasonable outlook for the medium term, given the downgrading of growth that’s been going on around us.

Inflation hovers around a worrisome 1% or so. Housing prices won’t likely again collapse, but they also won’t make generalized gains, either. And employment, at the heart of it all, refuses to drop much below the current 9.5%. Economic growth just doesn’t warrant it and employers are especially cautious.

High unemployment is expected to be with us for years to come.

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We are as close as you can probably get in an economy as large and as sophisticated as the U.S. economy to being becalmed, basically stuck in neutral.

That’s the impression one gets from the very first paragraph of the summary of the “Beige Book,” the compilation of economic activity across the various districts of the Federal Reserve.

The latest Beige Book was released by the Fed today and is based on information collected on or before July 19. Taken together, it’s a picture of an economy not declining, but growing at a level that’s probably not all that discernible from unchanged.

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The inestimable Paul Volcker has added his voice to those (including this blogger) describing the current, shallow U.S. recovery as the “Long Slog.”

Quoted Wednesday speaking in Canada by Dow Jones Newswires’ Don Curren, former Federal Reserve Chairman Volcker said of the U.S. economy, “It’s going to be a considerably long slog.”

The seemingly ageless Volcker is remarkably again a man of great influence on the financial events of the day as Congressional conferees try to hammer out financial regulatory reform. Some version of the “Volcker rule,” which would ban insured banks from participating in risky proprietary trading, is expected to be a key feature of the final legislation.

The Long Slog follows the Great Recession, the consensus moniker for the downturn now past. If, as some fear, we might be headed back to recession in a so-called double dip, the Great Recession name will have to be revised, as will the Long Slog. If we do double dip, which is considered unlikely by many observers, coming up with a new name will be among the least of our problems.

For now, I’m sticking with the Long Slog as a forecast and a descriptive name.

It’s the minimalist Federal Reserve.

With a tad of old-fashioned ‘white out,’ the U.S. central bank could have taken its statement issued at the conclusion of its March 16 policy meeting and re-issued it today to mark the end of its latest interest-rate confab.

Even Thomas M. Hoenig, the honorable dissenter on the Federal Open Market Committee, if left to repeat his solitary stand meeting after meeting.

Hoenig, the president of the Federal Reserve Bank of Kansas City, doesn’t want much, just for the Fed to abandon its phrase that near-zero short-term interest rates will be kept in place for an “extended period.”

Hoenig’s understandable view, in my paraphrase:  the economy is recovering, if slowly, so why use language that would seem to lock you into a longish-term commitment to emergency low rates?

Take away that “extended period” language and you would let people know that at some point you will return to merely easy monetary policy.

But the rest of the FOMC voters see no reason to shut off Groundhog Day. After all, they said (again) that “inflation is likely to be subdued for some time.”

The Fed seems to have a pretty good read on the economy. Slightly better today than in mid-March but far from out of the woods. Today, the labor market is said to be “beginning to improve.” In March it was “stabilizing.”

“Housing starts have edged up but remain at a depressed level.” In March, “housing starts have been flat.” 

The key fact seems to be that “employers remain reluctant to add to payrolls,” in the words of the Fed. That hasn’t changed and will likely only change to the upside very slowly in the months ahead.

That crucial indicator, and its molasses-like improvement, will keep the Fed’s statement writers nearly idle for the next few meetings. Nothing much will need to be changed.

The Wall Street Journal’s Lingling Wei reported Saturday on new guidelines that allow banks to call loans on their books “performing” even if the value of the underlying properties has fallen below the loan amount. So U.S. bank regulators are taking their cue from their Chinese counterparts now?

The regulators, who include the Fed, FDIC and OCC, argue the rules are designed to encourage banks to restructure problem commercial mortgages rather than foreclose on them. So the regulators are trying to do something about what financier Wilbur Ross termed Friday the coming “giant crash” in the commercial real estate market.

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If you are looking for relative economic optimism, check out the latest monthly result from the Dow Jones Economic Sentiment Index. This leading indicator of U.S. economic activity registered 31.8 in June, up 2.8 percentage points from the prior month.

It’s the fourth consecutive month of increase and the gurus behind the report say if the trend upward continues, it could mean a forecast of actual  U.S. economic growth in the fourth quarter of this year.

The index is a measure of positive and negative words used about the U.S. economy in 15 major U.S. newspapers. It’s a “wisdom of crowds” concept that has proved pretty accurate in forecasting some economic turning poisnt in the past couple of decades.

Here’s a debate I’m having with a colleague. I would guess many people are having the same conversation. It kicks off when I comment on Peggy Noonan’s column in Friday’s WSJ and refer to the Rush Limbaugh fracas of the past week:

Gabby: It’s a decent column, by the way. This anti-Rush stuff is such a diversion from what’s important.

Colleague: What is important is that this guy (Obama) is killing every penny of American savings available. The market is telling us all we need to know about the effectiveness of these spending programs.

Gabby: Problem is, the market has no credibility. Less credibility than a green president.

Colleague: Respectfully will disagree. I believe the market, the collective wisdom of millions of investors who have no other incentive but to make money, is the only credible thing we’ve got going here.

Gabby: Right, but we were like sheep, buying and creating a bubble in total ignorance of the underlying risks. Now we, the market, have lost more than 50% of our wealth. What credibility do we have? We’re all in panic, triage mode. So our actions don’t bespeak wisdom.

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