 Two bad omens may not make a recession, but it undoubtedly increases the likely hood.
The National Association of Realtors reported a 4.3% drop in existing home sales in August, the lowest since 2002, while the Conference Board said that consumer confidence fell six points between August and September, and the largest decline in two years. Together these two statistics do not paint a rosy picture for the economy.
Without doubt the recent credit crunch has contributed to real estate sales. The article cites an increase in number of "jumbo loans" which have failed to close. Jumbos are loans in excess of $417,000 and are not fully guaranteed by Fannie Mae or Freddie Mac. In many real estate markets, such as California, jumbo mortgages have become increasingly common as home prices have skyrocketed.
Obviously home sales will affect those employed by the real estate market, but more widespread is the indication that consumers are loosing confidence in the continued prosperity of the economy. The confidence indicator is considered a leading economic indicator of consumer spending which props up more than 3/4 of the United States economy. A sharp decline in consumer spending can send a shock wave through American industry and retail sectors leading to fewer new jobs and reduced hourly paychecks.
If I were to make a prediction today based on the data that we have I would say that we are certainly overdue for a recession. Economists are very bad at predicting cycles but one thing is for certain a coming recession would not be as severe as some hope. Though housing has made an incredible run over the past five or six years there is no indication that the fundamentals of the economy are so out of whack that we risk a severe pullback and massive layoffs.
That said I believe that the mortgage and financial service employers will continue to bleed at the hands of a shrinking tolerance for risk and tightening credit policies. I spoke with someone last week who worked for an unnamed lender and she believes that the entire sub prime market will go belly up. A very likely scenario which when added to troubles in the hedge fund market could make for a bumpy ride.
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