Interesting News of Consumer Spending in January
I’m not a big fan of politics but still found the President’s recent comments claiming that the economy isn’t really in that bad of shape interesting. Especially considering that today (2/29- the leap day) two separate Federal Reserve officials announced that the ugly housing market could actually damage the economy even more severely than it has already if measures are not taken to correct it. Both officials agreed that they believe this slump will be more pronounced than other historical downturns. They went on to say that financial institutions have been quite unwilling to expose themselves to the mortgage market. This means lenders are hesitant to lend to risky borrowers in a declining house price market. Simplified, this is the double whammy we’ve been discussing of late. Lenders are making it harder to secure a loan while the equity available in homes across the nation are simultaneously drying up.
Now that Freddie Mac is releasing the numbers, it appears as though January was a month full of refinance activity (thanks to the Fed rate cuts) but February is shaping up to be much more lackluster thanks to creeping rates.
This comes despite the fact that the Fed has been cutting interest rates steadily since September but have left the fed funds rate at 3%. As a key bank-lending rate, stock traders expect the bank to cut rates by another half-percentage point later this spring. Fed chairman Ben Bernanke said Thursday that rising inflation will make further rate cuts more difficult, as the central bankers not only seek to maintain economic growth, but aim to keep prices in check as well.
In the mean time stocks continued to dip today (leap-day) thanks to a combination of weak readings on manufacturing and consumer spending, record-high oil prices and the slumping dollar. I was surprised to hear that initial reports had concluded that spending by individuals rose 0.4% in the month of January despite all of the gloomy news. Unfortunately, the truth of the matter is that more currency changed hands on account of inflation (and a sinking dollar value)- in actuality spending was unchanged.
Experts claim that consumer spending has in fact been leaning more toward the conservative side of things as worries of this instability has individuals using discretion in purchasing decisions. I don’t need to reiterate the benefits of keeping that budget close, as least until the economy stabilizes.
