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Economic trends.


Now it's official. The National Bureau of Economic Research - the organization that makes such designations - indicated that the recession began in July 1990. Already, GNP has declined sharply for two quarters in a row - 1.6 percent in the fourth quarter 1990 and 2.8 percent in the first quarter 1991 - and the unemployment rate has risen over 1 1/2 percentage points. Other indicators have also deteriorated significantly.

So, given that we are in a recession, how much longer will it last? There is now some evidence that it will not last much longer.

One of the key reasons is that the Federal Reserve (Fed) has not been sitting on its hands. Since the recession began, the Fed has cut the discount rate - the rate at which banks can borrow from the Fed - three times: from 7 percent to 6 1/2 percent on December 18, 1990; to 6 percent on February 1, 1991; and to 5 1/2 percent on April 30, 1991. More important, as Chart 1 shows, the Fed cut the federal funds rate - the rate banks charge one another for reserves and a rate controlled by the Fed through operations to increase or decrease total bank reserves - from 8 1/4 percent to 5 3/4 percent. These substantial moves toward ease, coupled with the Fed's encouragement of banks to make loans to creditworthy borrowers (i.e., to mitigate the credit crunch that has partly resulted from overly strict lending requirements), will contribute significantly to ending the recession.

The timing of the effects of these policy moves is difficult to gauge. Research on monetary policy suggests that Fed policy actions affect the economy with lags.

While there are some signs that the trough of this recession is near, some of the numbers still look terrible. New orders for durable goods continue to weaken. Consumer spending for autos, while above January's depressed level, remains below 1990 levels, and industrial production continues to drop along with capacity utilization.

On the other hand, other indicators suggest that the bottom may be near. The Commerce Department's index of leading economic indicators increased for the second month in a row in March. The trade deficit continued to improve, suggesting ongoing strength in net exports. Consumer confidence surged in March with the dramatic victory in the Persian Gulf, suggesting that consumption, which accounts for two-thirds of economic activity, will pick up soon.

Further, there appears to be significant slowing in the rate of decline of some other key indicators. Employment fell further in April but by much less than in preceding months. In particular, manufacturing employment declined by far less in April, suggesting that the industrial sector may finally be nearing a bottom.

The housing sector already seems to have bottomed. Both new and existing home sales rose in both February and March, and March housing starts were significantly above their January low.

The pickup in housing market sales and starts made its way into mortgage lending. Chart 2 shows changes in the Mortgage Bankers Association of America (MBA) economics department's newly developed index of application volume for home purchases. After declining sharply during the second half of 1990, volume picked up dramatically at the end of January. The rise continued through March, as attractive interest rates and the resolution of the Persian Gulf war led many buyers to conclude that the time was right to purchase a home.

The upshot is that the odds are fairly high that the economy will emerge from the current recession soon. The recovery is likely to be anemic, compared to past recoveries, but it will be recovery nonetheless.

PHOTO : Chart 1 Federal Funds Rate

PHOTO : Chart 2 Application Volume Index
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Title Annotation:recession
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Date:Jun 1, 1991
Previous Article:Secondary market.
Next Article:Just the facts.

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