Monday, October 31, 2005


US Economy On The Brink Of Recession

CNN reports the US consumer is pulling way back. "Hurricanes can bury a lot of things, but don't let them bury a very important nugget in Monday's personal income and spending report: the consumer fell off a spending cliff in August and September!"

"Personal spending rose 0.5 percent last month, but when the effect of soaring oil and gas prices is removed to get a 'real' view of spending, then the number looks pretty anemic: real spending fell 0.4 percent in September after falling by 1 percent in August."

"The economy's growth rate could actually turn negative in the fourth quarter if the consumer doesn't perk up quickly. 'Coming on the heels of a 1 percent drop in August, the two-month decline was the biggest in nearly 19 years and leaves the spending level at quarter-end well below the Q3 average,' wrote economist Dave Resler."

"For spending to match the third-quarter level, thereby avoiding a decline, real spending must grow at a 3.6 percent annual rate (about 0.3 percent each month). With car sales reportedly quite weak in October, this could prove to be a rather tall order' he said."

"'Unless spending (primarily ex-autos) stages a rather convincing recovery in the next few weeks, the prospect of the first quarterly decline in consumer spending in 15 years could factor into the December 13 FOMC decision,' Resler wrote."

"'The U.S. consumer is quite vulnerable to rising market rates...the home ATM machine gets gummed up if rising mortgage rates lead to a correction in the U.S. housing market,' Dave Gilmore said."

"A possible assist for the consumer could be shaping up in the steady drop in gas prices at the pump. The problem is, in the view of Gilmore, that the Fed is raising interest rates, bond yields are rising finally as a result, and if energy prices keep falling and give the consumer some relief, and the economy a bounce, that could encourage even more rate hikes."

"'If bond yields keep rising which I think they will, then not even stocks are safe from a welcome decline in energy prices,' observes Gilmore. 'In this case lower energy prices could prove to be a Trojan horse unleashing a problematic rise in market rates.'"

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