U.S. Economy: Do You Feel
Lucky Punk, Well Do You?

With the holiday shopping season upon us, I thought it time again to bring up that huge gray cloud hanging over American consumers: the economy.

As you may recall, I’ve been warning that the economy will follow the housing market into the abyss. So much so, that some of my friends tease me about my “sky is falling” persona.

Laugh. Sigh.

I don’t like the fact that the economy is headed for what I suspect will be the worst recession in our lifetimes. And I don’t like to unnecessarily alarm people.

What I want doesn’t matter when it comes to the economy. What I wanted was home values to appreciate steadily over the years. Instead prices bubbled over into a turbulent sea known as foreclosures and credit woes.

The same is true of the economy. I would love nothing more than a steadily growing economy that provides plenty of havens to safely invest my children’s college funds.  Instead, my gut tells me that housing woes will ooze into the rest of the economy early- to mid-2008.

For once, I’m not alone in this assessment; doom and gloom stories abound:

“The Federal Reserve expects economic growth to slow sharply next year, and policy makers there are worried that even this forecast may prove too optimistic, according to an assessment that the central bank released,” reports The New York Times. Although the Fed report never mentions recession, concern is growing that high oil prices and the credit crisis will temper the U.S. economy. The good news is that the Fed believes unemployment will only rise a small amount and that inflation may actually edge down.

The Economist’s outlook is more dire:

The housing downturn has entered a second, more dangerous, phase: one in which the construction rout deepens, price declines accelerate and the wealth effect of falling prices begins to change consumers’ behavior. The pain will be intensified by a sharp credit crunch, the scale of which is only just becoming clear. And, in the short term, it will be exacerbated by a spike in oil prices – up by 25 percent since August – that is extreme, even by the standards of recent years. The result is likely to be America’s first consumer-led downturn in close to two decades.

Before you discount the Brits, keep in mind they predicted way back in 2004 the current housing decline. Their only mistake was how long it would take for home prices to fall. Now they are predicting the next wave of foreclosures and subsequent inventory glut will undo the American economy.

Given that America’s stock of residential housing is worth some $21 trillion (or almost one-third of all household assets), a 10 percent drop in house prices would make a discernible dent in consumption growth. If the spending response were at the top of economists’ estimates, for instance, consumer spending would slow by almost 2 percentage points. The economists’ studies, however, suggest that effect will be gradual: falling house prices will be an ongoing drag on consumer spending, rather than a sudden brake.

So far, this brake has been eased by strong gains in financial wealth. Thanks to higher stock prices, American households’ overall assets have still been rising smartly. If the stock market loses momentum along with the economy, the wealth effect on consumer spending could appear quite quickly.

The Economist adds that tightening credit, oil prices up 25 percent since August, and a belief that unemployment is actually about to surge will contribute to an economic fall.  One fear: that gas will soon reach $4 a gallon at the pump.

Even if there isn’t a formal recession, warns the Economist, it will feel like one because the American consumer’s ability to buy things will be sharply curtailed by the factors mentioned above.

But you don’t need the opinions of highly-trained economist to know something is wrong. A quick look at other headlines paints the picture:

Consumer Sentiment Hits Lowest Level in Two Years

Consumer sentiment fell in November from the prior month, reaching its lowest level in two years, according to a monthly survey released Wednesday.

The Consumer Sentiment index was 76.1 in November, down from 80.9 in October, and “significantly” below the 92.1 during the same period in the prior year, according to the Reuters/University of Michigan Surveys of Consumers.

“Rising prices for fuel and food had a devastating impact on household budgets, and falling home prices have diminished consumers’ sense of financial security,” said Richard Curtin, director of the survey.

Loan Crisis Entangles Freddie Mac

Losses at Freddie Mac underscored the continuing turmoil in the housing industry yesterday, and other developments reinforced the sense that conditions would not improve soon.

Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitment.

Deal Will Let Some Borrowers Keep Low Rates

The mortgage lenders Countrywide, G.M.A.C., Litton and HomeEq have agreed to let many potentially distressed borrowers in California keep the initial low rates of their home loans, a spokeswoman for Gov. Arnold Schwarzenegger said Tuesday.

During the housing boom, subprime mortgages allowed borrowers with little in the bank to buy homes. Low initial interest rates on the loans are expiring, pushing mortgage payments up and sending many borrowers into default and foreclosure.

California’s has been hard hit by faltering mortgages, leaving the state with seven of the 16 metropolitan areas in the United States with the highest foreclosure rates.

Home Prices Decline in 17 U.S. States

According to new home price data released yesterday, homeowners in at least 17 states lost money in the housing market over the last 12 months as home prices declined. California had a double-digit decrease; Florida and Nevada were not far behind.

Oil Prices Rise Above $99 a Barrel

Crude oil prices rose above a record $99 per barrel Wednesday as worries about inadequate winter supplies in the Northern Hemisphere and news of refinery problems stoked bullish sentiment.

The declining U.S. dollar and speculation that the U.S. Federal Reserve will again cut interest rates also boosted prices. Some investors put their money into oil contracts, betting that gains in their price will offset dollar weakness.

One-in-3 Chance of Global ‘Growth Recession’ – Deutsche (Bank)

The chances of a global “growth recession” – where world growth dips to historical troughs below 2 percent – are about one in three next year, according to economists at Germany’s biggest bank Deutsche Bank.

I could continue on day in and day out  with stories that indicate all is not well with America’s economy. That said, there are plenty of stories out there that assure us the economy is fundamentally sound and will continue to happily grow.

The question I have for my readers: Considering just a couple months ago these same experts vowed that the housing market is fine and dandy, do you believe the optimists or the pessimists? Or should I ask, do you believe the optimists or the realists?

3 thoughts on “U.S. Economy: Do You Feel
Lucky Punk, Well Do You?

  1. Summer

    tralalala… What sky?
    I am thinking to myself these two things:
    1. The rich will still get richer.
    2. I am glad I provide a commodity to rich people.
    I’m saving my pennies.

    Reply
  2. Aron

    During the housing boom, subprime mortgages allowed borrowers with little in the bank to buy homes. Low initial interest rates on the loans are expiring, pushing mortgage payments up and sending many borrowers into default and foreclosure.

    Reply

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