The bond market had a glorious pre-Fourth of July, celebrating a record volume of financing with the lowest interest rates in almost 13 years. There's no reason to think this jubilee won't continue all summer.
A week ago, President Bush spoke to a group of Republicans in Detroit and said he was tired of hearing that the economy is not getting better when he is sure that it is. On Thursday, however, the federal government reported that unemployment rose, nonfarm payrolls dropped, durable goods orders declined, and factory orders were down.
The Federal Reserve promptly cut the discount rate half a percentage point to 3%, its lowest level since July 17, 1963, just before President Johnson said the United States could afford both guns and butter, and we were off to the races trying to fight a war in Vietnam and build a Great Society. In the 29-year meantime, the discount rate climbed to a high of 14% in 1981.
Last spring when bond dealers looked ahead, man y rejected the notion that the Federal Reserve would push interest rates still lower, a mistaken notion based on two misconceptions. They believed the economy had some underlying strength, and they failed to realize that President Bush, seeking re-election, would prevail and the Fed would heed his call to cut interest rates.
The problem with the economy now is that there's nothing driving it. Last week as Mr. Bush expressed his annoyance with pessimistic views, Aetna Life announced it was laying off 4,800 people, or 10% of its work force, and Hughes Aircraft said it would ax more than 9,000 jobs, or 15% of its work force.
California ran out of cash and began to pay its bills with i.o.u's for the first time since the Great Depression. And New Jersey overrode Gov. Jim Florio's budget veto and began cutting back spending.
In this summer of political conventions and presidential electioneering, the federal government will do nothing to dispel the pessimism. It is bogged down, as its inaction in the wake of the Los Angeles riots attests. Whenever Washington tries to get its act together, somebody mentions the $400 billion budget deficit, and nothing is done.
State and city governments are strapped for money; California's resort to chits demonstrates that. And corporations are not in the greatest shaped, either, as Aetna and Hughes prove.
As dreary as all these developments are, they are not bad news for the bond market. The municipal market handled a record $112 billion of bonds in the first half of the year without flinching, and interest rates declined substantially at the same time. That's strength, and it's not going to go away.