Tuesday, January 31, 2006

Why An Economic Slowdown Is Coming No Matter What They Say On CNBC

From Reuters:

The U.S. economy expanded at a meager 1.1 percent rate in the fourth quarter of last year, but inflation aside from volatile food and energy prices was running a bit faster than Fed policy-makers would like to see.

However, so-called core prices edged up just 0.1 percent in December and have gained only 1.9 percent over the past 12 months, just within the Fed's perceived comfort zone.

While most economists expect the economy to rebound sharply this quarter from its surprisingly sluggish pace at the end of 2005, some expect a softening housing market to eventually take the wind out of the expansion's sales.

Merrill Lynch chief economist David Rosenberg points to declining prices for new homes as foreshadowing the weakening that may lie ahead.

"New home prices are deflating -- bye-bye mortgage equity withdrawal boom, which, by the way, helped underwrite almost 40 percent of the growth in consumer spending in the past three years," he said in a research note.

If the mortgage equity piggy banks close and people are already carrying massive amounts of debt and in negative savings territory, common sense would tell you the American consumer can no longer "underwrite" the world economy (note the trade debt) nor corporate profits.

Which means a slowdown unless something else takes the place of consumer spending.

I know that the talking point on CNBC is that business spending will replace consumer spending in the next year to keep the U.S. economy out of recession.

But why would business spend money if the American consumer can't afford to buy anymore?

I mean, I'm not economist and I admit to being a novitiate about this stuff, but common sense tells you the economy is in serious trouble in the months ahead.

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