My Two Cents - "Random Musings and Potpourri"
Andy Sutton

3/9/2007

As 'the week after' comes to a close, nothing in particular has jumped onto the radar screen. To a large extent, it would seem that we are back to business as usual with the equity markets beginning to rise again, volatility decreasing and complacency returning to the markets. Under the surface though, there are quite a few issues that demand our attention. Since these issues are all fairly timely, rather than focus on one area in particular, I am going to use this week's edition to survey the landscape a bit, point out oddities, absurdities and maybe kick over a few rocks in the process.

Markets blame weather on poor retail sales (Isn't it always the weather?)

It would seem that the perceptions of the state of the entire world or in this case the US are formed by what happens in the Northeast. Unseasonably warm weather in December and early January was blamed for a sudden fall in the price of energy, yet retail sales were average at best. Yet when the numbers don't cooperate, the media is quick to blame it on cold weather. Certainly, we will need to see if a trend develops here, but there are cracks appearing in the American consumer's armor. Resetting mortgages, high credit card loads, negative savings, taxes, and inflation are all warring on the pocketbook of the middle class. How much longer the average consumer will ignore the pressure and keep spending is anyone's guess, but the smart money says sooner than later we're going to see some retrenchment.

Existing home sales decrease 4.1%

David Lereah at the National Association of Realtors has been calling the bottom with every poor housing report since this past summer. His calls became so annoying that even MarketWatch was compelled to do a story on the NAR's Chief Economist and the fallacy of his calls. However, after this latest housing thrashing, Lereah has been rather quiet. I think he now realizes what many of us have been saying for some time now: The end is nowhere in sight, and we are probably closer to the first inning than the ninth. The recent troubles in the sub-prime market have been well publicized with many lenders getting into hot water. The pundits (Big Ben included) have first said that the market was rock solid. Now with that obviously not being the case, they have resorted to denying that there is or will be a spillover into the broader economy. Stay tuned on this one; it is a developing crisis. However, based on the vehement denials, I am predicting a spillover; and soon.

Service sector growth slows in February

In a reversal of recent trend, the service sector grew at a considerably slower pace in February. While I wasn't able to find such an instance, I wouldn't be surprised if the weather wasn't blamed for this as well. The non-manufacturing sector is going to be one to watch; and closely. If a trend develops here, look out. It is the only area of our economy that is growing at all. Housing and manufacturing are in contraction. A recession will be hard to deny no matter what the numbers say if the growth in the service sector evaporates. Also, watch the jobs numbers. A good majority of the jobs created have been in the service sector. Look for correlation. A confirmation there could be a good indicator of trouble ahead.

Consumer credit outstanding increases $6.5B

Consumers continue to show a willingness to rack up debt. It would not seem as though a retrenching is in the cards anytime soon. However, at least in my corner of the world, I am noticing more and more people complaining about having to use credit to tread water. I plan on using a significant portion of this week's radio show to discuss specific things that people can do to cut back. Call me cynical, but I just don't see the owners of all this debt taking hyperinflation for an answer. It is my belief that if you can avoid debt, you will be better off. So maybe we've crossed another boundary in terms of credit. Loans that were taken on to make discretionary purchases may now be needed to pay for staple goods instead. Take a look and listen around you and see what people are saying. I'd be curious to hear what is being said. The spin by the media here is that the debt taken on is less than prior months. While this is certainly a good thing, it would be nice to see the total outstanding debt contract for about 5 years straight.

Paulson talks tough to China on banking system

This one absolutely takes the cake. Paulson, in a speech to the Shanghai Futures Exchange made the case for China opening up its banking system to foreign investment and that a failure to do so in a timely fashion will impede China's ability to produce robust capital markets. He also warned that China's economy is unbalanced towards exports. No kidding Einstein; someone has to produce all the gadgets we are consuming. Tough talk to China on currency and banking? This coming from the Elvis Presley of deficits bar none. Intimating that China should take banking cues from the United States is like sending your teenager to take driving lessons from Ted Kennedy. I'd be careful though, Mr. Secretary. In case you forgot, the Chinese have the leverage here. They can make your currency, your job and your Department irrelevant with the flick of a switch. Think about that before you strongly suggest the Chinese do anything.

Programming Note: My Two Cents will be making its official debut on blogtalkradio this Sunday night at 6:30PM. Last Sunday we had a very successful pilot program and hopefully worked out some technical difficulties. Archives as well as show times and other information are available at http://www.blogtalkradio.com/my2cents I would invite everyone to take a few minutes and listen or call in to the show to ask questions or make comments.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.