Evidence that the economy is stronger than previously thought was confirmed when the Commerce Department announced that Gross Domestic Product growth of 3.9 percent over the late summer third quarter despite plunging sales and credit challenges in the housing market.
Surprisingly resilient was the consumer, who contributed 2.1 percent of the nearly 4 percent growth. Normally, consumers account for about 70 percent of the GDP, so it was business that picked up the slack with 7.9 percent growth in purchases.
Overall, prices rose 0.9 percent for the consumer while wages rose 0.8 percent, said the report.
It was enough to move the smart money from betting on a half-point rate cut in the Federal Reserve's short-term borrowing rates to no rate cut at all, particularly in light of its aggressive half-point rate cut six weeks ago.
The Fed is also closely watching oil prices, which have risen so far of late and to record levels that consumers are expected to pay at least 10 percent more in heating costs this winter. Also, worsening housing sales and lower prices suggest that the housing sector remains in recession. Continuing tight borrowing conditions may impact housing well into 2008.
That may have been the deciding factor. The Fed cut short-term interest rate for the second time in six weeks, but only by a quarter point. The hope is that the decreased cost of money will improve liquidity for such things as home equity lines of credit, credit cards, mortgages and other consumer borrowing.
The question is -- how will the market respond? Interest rate watchers were surprised when lower borrowing rates for banks failed to result in lower mortgage rates. That's because mortgage interest rates aren't tied to short-term rates banks use to borrow from each other, but to long-term mortgage-backed securities. Bond traders hate inflation, and lower borrowing rates between banks could be viewed as inflationary.
One thing that may help housing in the short and long term is less inventory from builders. Over the last two quarters, they've cut production by nearly 30 percent, enough to let the market absorb its excess inventory more quickly.
However, it's difficult for markets to recall all the data at once. On Halloween, the stock market overreacted by shooting upward a couple of hundred points. In the first 10 minutes of trading on Thursday, the next day, the market sobered up and swung the other direction.
One bright spot is that mortgage rates did come down to six-month lows, according to Freddie Mac, with the 30-year fixed-rate loan averaging 6.26 percent for the week ended November 1, 2007. That's down from 6.33 percent last week, and should spur buyers into showing whether there really is pent-up demand or not, as the National Association of Realtors maintains.
Mortgage interest rates may not come down again until there is stronger evidence of recessionary activity -- fewer jobs, higher wages, or a slowdown in spending.
