The most important number in the economy is one nobody knows (via RexNutting)
Forget about the unemployment rate, the inflation rate, the gross domestic product, the Dow DJIA, -0.33% or the yield curve, because the most important economic number right now is one that’s largely invisible: The supply of credit to the U.S. economy.
Look at the way the stock market SPX, +0.09% and the bond market TMUBMUSD10Y, +0.00% have overreacted in recent months to small changes in the expected path of monetary policy, or the way they have swung wildly in reaction to rumors about the status of U.S.-China trade talks. Or the way housing prices became untethered from fundamentals last decade.
When the level of lending changes, it’s hard to discern the cause: it could be due to a change in how much credit is being demanded, or how much credit is being supplied by banks and institutions that invest heavily in bonds. The difference is important to the Fed, because a widespread credit squeeze can kill an expansion with little warning.
One possible message we can take from an inverted yield curve is that banks and other providers of credit will find it unprofitable to lend because the Fed has tightened too much. If you borrow short and lend long, an inverted yield curve means you can’t lend profitably. The Fed knows how much real resources can be supplied in the near term. The unemployment rate tells them the supply of labor. The capacity utilization numbers say what the supply of manufactured goods is. It knows the potential near-term supply of oil, soybeans, steel, houses, cars, airplane trips, haircuts, smartphones, and a thousand other goods and services.
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