can't remember if a yellow alert is scarier than an orange one, but whichever, cancel it. The first economic data from August have produced one clear result: mortgage rates are no longer poised for a run to 7.00%. 6.50% was a top, and today's 6.25% is slipping, as recovery optimists digest this week's thistle-garnished buffet. Five-something mortgages may not be a historical curiosity after all.This morning's news staggered the cheerleaders: August payrolls, expected to grow, instead shed 93,000 jobs. That makes it 595,000 jobs lost in the last seven months of "recovery." The Kudlow Kampers bolted for their last refuge: there must be something wrong with the Labor Department's data. The GDP will grow at a 5%-6% rate in the 3rd quarter, right? Then jobs must be growing, right? You've just counted wrong. The other August data confirm rapid GDP growth, but a little poking around confirms the lousy payroll data, too.

The purchasing manager's index, the other definitive data for August, moved higher, into positive territory for the second-straight month, now just below the two prior false-recovery peaks reached in June and December 2002. Ten of eleven internal components in the index improved over July, except one: employment, which continued to contract. Last week, new claims for unemployment insurance were supposed to fall below the 390,000 barrier. Wrong: they jumped to 413,000, over 400K for the first time in weeks, and all four prior weeks were revised to higher figures. On Wednesday, the Fed released its "beige book", the monthly collection of soft-data bedtime stories from the twelve Fed districts. The cheerleaders ballyhooed the report as a corner-turner. Some corner: "sluggish" (San Francisco, Chicago); "weak" (St. Louis); and "slow" (Dallas). The bright spots: "mixed" (Atlanta); "improved slightly" (Kansas City); "modest" (Richmond, Cleveland);

"slow and steady" (Philadelphia, Minneapolis); "cautious" (Boston); and New York reported that the blackout had not made anything worse. So, how do we square this tepid commentary with fast GDP growth and still-shrinking employment? I think we must consider the chance that something unusual is going on. One way to race the economy without durable effect: liquidate assets and spend the proceeds. This GDP is roaring on junk food and gin, in the form of $450 billion of borrowing against future tax revenue, and spending another $200 billion of tax money earmarked for Social Security. That's more than 6% of GDP. We have also liquidated and spent one or two trillion dollars' worth of home equity in the last three years, and through the miracle of the home equity line of credit are burning another $25 billion every ninety days --

just as the rate of home price appreciation is gliding down to its lowest level in three decades. With all of that stimulus, businesses still feel the need to liquidate labor, and have taken only the most timid steps to invest in new ventures or resources. The economy can, of course, find traction at some moment. Until then, I think the stock market will be as good a rate indicator as any. In a very few months we are going to know whether increasing productivity generated by labor liquidation and cost-cutting is going to result in higher authentic profits and business investment, or is a symptom of something unpleasant. If businesses are compressing themselves in a still-unsuccessful effort to compete, drowning in post-bubble capacity, sooner or later stocks will tell us.

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