The Economy: The Makings Of A Perfect Storm?

By Daniel DiRito | Related entries in Breaking News, Economy, General Politics, In The News, Money

There are more signs that the wheels may be about to fall off the economy and the Federal Reserve seems a bit nervous about how to best insure that doesn’t happen. The prevailing question at the moment centers on whether to continue the long string of rate hikes in order to keep inflation in check or to ease off in order to keep the economy rolling forward. Regardless, it now appears that consumer confidence has reached a level where spending is being voluntarily restrained in anticipation of leaner economic times. Bloomberg has two articles discussing the economy here and here.

Aug. 29 (Bloomberg) — U.S. consumer confidence fell to a nine-month low in August as higher gasoline prices raised fears of inflation and a slowing housing market rattled Americans, a private survey showed.

Americans are restraining their spending, which makes up 70 percent of the economy, as gasoline prices are kept aloft by violence in the Middle East and a slowdown in the housing market makes them feel less affluent.

“The housing slowdown is an increasing drag” on growth, said Zoltan Pozsar, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “That consumer and business confidence hold up as housing slows is crucial for the expansion.”

Frankly, one needn’t be an economist to realize that if the housing market continues to slow, consumer confidence is going to weaken. Further, there are indications in a number of regions that housing prices may actually be dropping…a situation that will not only slow consumer confidence; it may well lead to a surge in foreclosures and bankruptcies and set into motion a scandal similar to the Savings & Loan debacle witnessed during the late 1980′s.

“When you have a very visible strain in the economy like housing at present, something that probably won’t break but just might, the Fed gives more weight to the potential for exponential losses,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “A policy shock would be more costly than usual at present.”

Minutes released today of the Federal Open Market Committee’s Aug. 8 meeting, where interest rates were kept steady for the first time in two years, will likely show how worried policy makers are about a property downturn versus the dangers of accelerating inflation.

Unfortunately, it may be a case of over optimism to presume that the Federal Reserve’s monetary policy can fully manage the factors that drive the U.S. economy…a belief that gained credence during the Greenspan years…a period of relative stability. Economic problems can easily spiral out of control as it is virtually impossible to isolate the influence of one economic segment from the remaining segments. Further, housing may well be the single most influential segment…one capable of triggering exponential ramifications.

To read the full article at Thought Theater, link here:

www.thoughttheater.com


This entry was posted on Tuesday, August 29th, 2006 and is filed under Breaking News, Economy, General Politics, In The News, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Responses to “The Economy: The Makings Of A Perfect Storm?”

  1. Dave Schuler Says:

    It may be instructive to read your post along with this post from Econbrowser. Menzie Chinn explains why discretionary counter-cyclical fiscal policy has been rendered quite difficult by the budgetary policies of the last few years.

  2. sleipner Says:

    An interesting thing I’ve heard almost every time I hear that the economy is tanking…corporations and those in higher end management jobs are doing great. Not surprising, I suppose, given that this administration’s entire focus has been on giveaways to those folks.

    What with the housing market tanking, oil prices sky high (and oil companies raking it in, of course), the trade and budget deficit out of control, the national debt causing most of our country to be owned by China, personal savings rates in the negative range, and real wages not having moved appreciably since 2000 it only takes a “duh” moment to figure out we’re headed for trouble.

    The only thing I keep hoping is that we get these moronic neocons and their toxic policies out of control before we reach the unrecoverable stage, if we haven’t already.

  3. DosPeros Says:

    Sleipner, I truly do love you. There is no pretense, no guile, no muddling with the vageries of data — always just unadulterated, straight marxist parania & envy, 151 proof, kamakazi-style lefty-ism, burning with the youthful passion only summoned from the wells of underground bohemian meetings taking place in…Sunnydale, Florida.

    Well, us “higher ends” (and I can only assume that “higher” refers to financial status and not the etheral “higher-end” spiritual plain for which I also inhabit) — are feeling the economic crunch as badly as anyone.

    Just the other day, I looked to Mrs. DosPeros while we drank martinis on the veranda and told her, “Honey, we’ve got to cut down the spa visits, just a bit. Maybe only 4 or 5 times a week.” She of course protested vehemently and demanded that I quit the Country Club if things were so out of control. “Absolutely not,” I declared. In the end, we decided to fire Lupe the Gardner and hire a service — although, without doubt our decision to shitcan Lupe the Gardner will be the source infinite conjecture at the White Pony Garden Show Gala this year.

    Alas, my point is this Sleipner: We all have it hard. I’ve gone from drinking Omega to a $15 bottle of Cab from God-knows-where New Jersey. We can hardly pay the stable cost for the childrens’ ponies. We might have to re-route our vacation from the French Riviera to some domestic locale (undoubtly crawling with undesirables). Forget about the Bentley I’ve had my eye on for several years now, out of the question. As tragic as it might be, if things continue along this dismal economic path, I might have mortgage The Skipper.

    Please Sleipner, don’t hate me — we are just like you (accept possibly with a bit superior grooming) and we hurt too and we love you.

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