Waiting to exhale fresh economy --Worrywarts' believe crawl from recession far off

<a href=www.mortgage101.com>Source Friday, April 04, 2003 By Lou Barnes Inman News Features

In a shoving match between awful economic reports pushing interest rates down and good news from Iraq pushing them up, Iraq won.

Mortgages have settled today just under six percent, above Freddie Mac's early-week survey finding of "5.79 percent plus .6 percent origination fee" released yesterday.

One week ago (seems like a month), war-watchers here and elsewhere thought our blitz to Baghdad had stalled, and the bond market reversed from wild optimism to fear that war would stretch for months. Rates fell on Monday, looking like they might break below 5.75 percent, needing only a push from some poor economic news.

We got the poor news, and then some. The ISM manufacturing index (a survey of purchasing managers) for March dropped to 46.2 from the 50.5 break-even economy in February, and the companion index for the service sector collapsed to its worst reading in two years, down to 47.7 from 53.9. New claims for unemployment insurance soared last week to a post-9/11 level, and this morning the Labor Department reported the loss of 108,000 jobs in March, double the forecast contraction -- triple, including downward-revised numbers for February.

The ISM reports and job data are the best indicators available each month. Were it not for Iraq, financial headlines everywhere would today be shouting, "New Recession!!!"

But there is Iraq. The news there has been nothing short of splendid. Those of us who worried about the war plan and the size of the force deployed need not have bothered, as the brilliant race to Baghdad International has made the force issue a historical curiosity. Pre-war dread of pitched battles with the Republican Guard and widespread destruction of Iraq's infrastructure are behind us. Last week's worry about a guerilla war is dwindling with the Fedayeen, who seem to have had little civilian support, and there is no evidence of large-scale humanitarian crisis anywhere in the country. Even in extremis, Saddam (like Hitler) has not (yet) used WMD. The Iraqi failure to detonate explosives in place in oil fields, terminals, dams and bridges says Saddam's subordinates are less dedicated to scorched earth than he.

Baghdad and Basra remain, but it looks less and less as though there is a Republican Guard trap waiting in either place. The zoomies said they have "degraded" those forces, and it looks as though they have. Winning the peace also lies ahead, including relations with allies current and former, and dealing with other dangerous places. But -- incredibly to many -- the Iraq adventure may have some of the greater benefits claimed by its proponents. One can't prove cause and effect, but news this morning says that China last week cut off North Korea's oil spigot for three days, and that that action has had a clarifying effect on Pyongyang.

When the financial markets awarded victory to Iraq over economic data, they told us all we need to know about interest rates in the near term. The overwhelming bet placed in the markets: the sinking economy in March was not a new recession, it was a national intake of breath, held for three weeks in front of CNN, Fox, CNBC -- war 24/7. Once the country exhales, gets the anxiety level down to tolerable, and begins normal respiration, then the economy will return to the recovery track it was on in January, and rates will begin to rise.

That's the bet. I don't believe it, but I'm just a typical, bond market worrywart. Oil has trouble beyond Iraq (Venezuela and Nigeria); Japan and Europe are sinking to recession; and corporate America and Wall Street still have post-bubble trouble.

If the deep breathers are right, we should get quick news of tension relief: some hiring, and increased consumer confidence and spending. If we don't get something real, and quick, then it's just a stock-market crazy on the phone again.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colorado. He can be reached at lbarnes@boulderwest.com.

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