How is the economy going to rebound when food and gas are so expensive and credit is so tight?
There has been a lot of optimism in the stock market lately, which I obviously welcome as someone who rarely shorts things in real life and who is usually fully invested in some sector of the market. However, I just can't shake this pessimistic feeling that I have about things. I'm trying to figure out why I am so down on the economy right now. Part of if might stem from the fact that I work in a field that is related to the auto industry and that my wife first worked for a now defunct mortgage company and currently works in the corporate office of a major real estate company. These industries are in rough shape. An analyst who I highly respect, Dr. Stephen Leeb is very bullish on things right now (Market Update) and the Federal Reserve has injected an unprecedented amount of liquidity into the system. Still, I can't shake the feeling that we are going to re-test the lows in the market before things are all said in done.
Consumer spending is the engine that drives the U.S. economy. We are a nation of consumers, not producers. There are two things that I believe are going to have a major negative impact upon consumer spending. They are banks tightening their lending standards and inflation.
For a number of reasons that I have touched upon in past posts inflation is out of control right now, despite what the CPI says when the government reports it. Food prices are skyrocketing and gas prices are at all time highs. These are things that everyone has to buy and the more expensive they are, the less money people have to spend on other things. See the links below for a few examples of what I am talking about.
Gas Sets Second Straight Record High
Rice Jumps to Record, Corn Near High as Demand Outpaces Supply
Corn Hits $6 a Bushel on Tight Supplies
In addition to being hammered by raging inflation, the credit crunch is preventing consumers from seeing the full impact of the dramatic rate cuts that the Federal Reserve has made over the past six months. Despite the fact that the Fed has lowered its target rate to 2.25%, according to bankrate.com the average 30 year mortgage rate still sits at 5.81%. This isn't high, but it is nowhere near as low as it would have been with this sort of Federal Funds rate in the past. Not only are the real rates that consumers are able to get rates not dropping as quickly as they have in the past, but banks are becoming much more risk averse and selective about who they extend credit to. Add in the fact that consumers cannot tap the equity that they have in their homes like they had been and these factors will have an adverse impact upon consumer spending as well.
Lenders Ease the Throttle on Car Loans
Late payments on consumer loans at 16-year high
Well, there are my optimistic thoughts for the morning. Despite all of the enthusiasm in the markets right now, I personally can't shake the feeling that there is more pain to come. I am just trying to figure out if I am being unnecessarily pessimistic or if this is the way things really are.
On tap for today is the March employment report. It will be interesting to see what it looks like, even though I have said in the past that I am often skeptical of the numbers that the government reports. Hopefully yesterday's rough jobless claims number isn't a harbinger of what it will look like.
Jobless Claims Highest Since Sept. 2005
Have a great weekend everyone,