On Friday, the Commerce Department reported that consumer spending declined 0.5% in September.  This sent the Dow down almost 250 points as worries about the recovery came back to the fore in the minds of investors.  The US economy relies heavily on consumer spending & until this most recent report, consumer confidence has been low in recent months but consumers on the whole continued to increase spending.  The decrease in consumer spending clearly demonstrates that government programs, such as “Cash for Clunkers”, have enticed consumers to make purchases that they would not have made otherwise.  The government will need to continue many such programs in order to maintain consumer spending.  There will be no recovery if consumers reign in spending.

 

Businesses recently surveyed by Kiplinger say they will borrow less, save more & remain vigilant on spending.  This is certainly good advice for most households & should be expected whenever incentives to purchase are curtailed; however, saving may be difficult as many are surviving reduced income impositions with supplementing from savings.  As defaults continue to rise, this puts great strain on banks.  Nine banks were seized on Friday, bringing the total to 115 for the year & more are expected.  CIT declared bankruptcy on November 1st, further evidencing the hardships of commercial lenders.  The risk of commercial loan defaults initiating a new collapse to the markets remains high, with hospitality & retail sectors at great risk.  Consumer spending will be critical.

 

The big economic items to watch this week are the Fed Meeting wrap up on Wednesday & the Employment Report on Friday.  The Fed will have to leave rates where they are.  Falling consumer spending will give rise to discussions of potential Deflation.  The GDP Price Index released with the GDP on Thursday last week, indicated that prices for all goods & services within the GDP increased only 0.8% when 1.4% was expected.  The previous quarter GDP Price Index came in at 0% increase.  The 0.8% increase in Q3 may indicate the government programs designed to stimulate consumer spending are having a direct affect on consumers but are not generating much residual momentum.  Volatility

 

 

This Week:  Fed Meeting adjourns on Wednesday, Unemployment Claims on Thursday & the Employment Report will be released Friday morning.

 

This Economic Commentary is NOT AN INVESTMENT RECOMMENDATION.

 

Richard Stephenson

Residential Mortgage Division

Bank of America