Consumer confidence has been dropping like a rock, due in large part to the housing market and the mortgage credit crunch putting downward pressure on the stock market. As described below, its a perfect storm. Falling housing values causes equity to drop, which combined with mortgage credit tightening cuts back on one important source of consumer spending - equity loans - which in turn hit an important sector - the home improvement industries.
Skyrocketing oil prices create inflationary fears, as the rising price of oil eventually effects the price of almost all consumer goods and food, and the expected lower consumer spending results in lowered expectations for corporate profits, which trigger lower stock prices, and suddenly Americans see their retirement accounts shrinking instead of growing, and confidence is lowered further.
Economists said conditions are being exacerbated by renewed problems in financial markets as investors have become worried by a string of huge losses reported by some of America's largest corporations, including General Motors, Merill Lynch and Citcorp. These sobering earnings reports are raising concerns about how many more billions of dollars in losses have yet to be announced.
There also are worries about the fall in the value of the dollar to record lows, which makes imports more expensive for U.S. consumers, and a big run-up in oil prices, which briefly traded above $98 a barrel this week. Since August, crude oil prices have soared by 42 percent.
The rise in oil prices, blamed in part on the weak dollar and increased Middle East tensions, has pushed gasoline prices above $3 a gallon at the pump.
"We have a perfect storm of negative factors affecting the consumer right now," said David Jones, chief economist at DMJ Advisors, a Denver consulting firm. "We have higher energy prices, declining home prices and a crisis-related tightening of credit."
Economists are worried that a deepening slump in housing, which has dampened sales and prices, could intensify in coming months because of continuing credit problems.
Many lenders, faced with soaring defaults on subprime mortgages, loans made to borrowers with weaker credit, have tightened their standards, making it harder for prospective buyers to qualify for a loan.
The housing crisis is coming after a five-year boom that saw sales set a string of records and home prices rise at double-digit rates in the hottest markets. With home prices now falling in many parts of the country, the worry is that consumers, feeling less wealthy as they see their biggest asset shrink in value, will start to pull back on their spending. Such a drop would be magnified by the surge in energy bills, which would leave consumers with less to spend on other items.
I'm sure glad those Republican tax cuts for the wealthy were enacted by the Republican administration several years ago. it's comforting to know that high-income fat and rich Americans will be able to weather the storm and not lose sleep over this.
But we've officially entered the election year now, so after seven years of favoring wealthy Americans President Bush will probably float a proposal to throw some scraps to the rest of us --in the form of $100 annual tax credit -- or some other bullshit handout meant to get his sorry, criminal GOP cohorts into the White House so they can screw middle America for another four years.
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