Monday, December 3, 2007


All eyes are now on the fourth quarter. This is make or break time for both consumers and the Federal Reserve, whose Dec. 11 meeting is the last of the year. Consumer spending has been holding up, even if much of it is spent on gas, heating oil, and groceries. So economists are watching holiday retail sales closely to gauge whether consumers (and the economy) will stay healthy.

Consumers’ health depends in part on whether the credit crunch continues for mortgages. Lenders are again offering a full range of jumbo loan programs with stated income, the segment most affected by the crunch, though jumbo rates are still high. This could signal some easing of the mortgage crunch.

But it really is up to Congress to raise the conforming lending limits on Freddie Mac, Fannie Mae, and FHA. Even Treasury Secretary Hank Paulson is urging action, since the so-called GSE’s (Government Sponsored Enterprises) were set up to be lenders of last resort when banks cut back on their lending.

He has called the Senate's failure to pass legislation overhauling mortgage giants Fannie Mae and Freddie Mac "very frustrating," saying that the two government-sponsored entities need to be playing a bigger role in the housing market.

"If we ever need them it's during times like today, and they're most valuable when there is distress in the mortgage market," he said. "I'd like to see them playing an even bigger role."

The Fed has just come out with the first of its quarterly reports designed to make its decisions more transparent. Inflation is expected to remain contained. Headline inflation, as measured by the PCE index, is expected to slow to 1.8-2.1 percent in 2008, down from around 2.95 percent this year. Core inflation will remain steady in a range of 1.7-1.9 percent. It is expected to plunge below 2 percent by 2010, another reason for the Fed to cut interest rates further in Dec.

Inflation is subsiding in part because Fed officials cut their growth forecast in 2008 to a range of 1.8 percent to 2.5 percent next year, down from the previous forecast of 2.5 percent to 2.7 percent released last July. This is why consumer spending is so important, since it makes up some two-thirds of economic growth.

New-home construction and sales are firming, as Oct. new-home sales actually rose 3 percent on higher apartment construction. And the NAR’s Oct. pending home sales index was unchanged for the first time in a year.

The Conference Board’s Index of Leading Indicators (LEI) that attempts to predict future economic activity has been somewhat of a mystery this year. The LEI has been essentially flat in 2007, continuing the yearlong pattern of alternating monthly increases and decreases, and it has gradually returned to its August 2006 level.

“Meanwhile, real GDP grew at a 3.9 percent annual rate in the third quarter, moderately stronger than the 2.2 percent average annual rate in the first half of the year,” said the release. “The behavior of the composite indexes so far continues to suggest that risks for economic weakness persist, but economic growth should continue in the near term, albeit at a slower pace.”

Consumer sentiment indexes, another closely-watched indicator, are less reliable. But they also measure consumer attitudes towards inflation, and it is the consumers’ perception of inflation that determines how tightly they control spending.

The U. of Michigan 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.

The Conference Board’s confidence survey also declined for the third consecutive month, “and continues to hover at 2-year lows”, said its press release. But a more recent spending survey was more upbeat. "Consumers are in a festive mood heading into the Thanksgiving holiday," says Lynn Franco, Director of The Conference Board Consumer Research Center. "And, it appears they are willing to spend more than last year, though retailers can still expect a fair share of bargain hunters will be lining up for the traditional kickoff this Friday."

Copyright © 2007

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