Personal Finance Advice

Wall Street enjoyed a nice four day winning streak before renewed stagflation fears sent investors scurrying.  Economic reports that were released showed that growth had stalled along with increasing signs that unemployment may be on the rise.

All eyes have to turned this week to Fed Chairman Ben S. Bernanke as he speaks to congressional hearings on the state of the economy.  He said while he doesn’t expect a return 70’s style “stagflation”, he does concede that with the continuing housing slump, some smaller banks could begin to fail.  Some analysts expect conditions in the credit markets to worsen further in the short term as lending institutions continue to write down losses.

With the dollar hitting record lows the price of energy and commodities continued to rise with oil and gold trading at record highs.  Overall consumer spending rose in the month of January but much of that can be attributable to the higher prices.  On a positive note, the weak dollar has spurred a growth in U.S. exports with the nation’s trade deficit shrinking for the first time since 2001.

Even with the specter of rising inflation and a falling dollar, many believe that the Fed will cut rates once again after it’s next scheduled meeting on March 18.  Financial markets have already priced in a half percentage point cut in futures trading.

Unless other central banks follow suit and lower their rates you can expect more downward pressure on the dollar and a rise in prices for dollar denominated commodities.

Many different factors are beginning to take their toll on the American consumer as they try to cope with the current woes of the economy.  Consumer confidence continues to fall as more and more people grow worried about a recession.

Many retailers are having to downgrade their earnings forecasts for this quarter as consumer spending shows increasing signs of weakening.  High end retailers are faring the worst, as consumers are becoming much more cost conscious at the checkout counter.

The prolonged housing slump is expected to continue for the foreseeable future.  The sharp decline in housing prices has taken a big chunk out of the wealth of what for many is their single biggest asset.  Many who have purchased homes in the last two years now have mortgages that are worth more than the values of those homes.

The subsequent collapse of the sub prime market and the accompanying credit crunch has also had a large effect on consumer spending.  With the troubles of the banking system, individuals and businesses are finding it harder and harder to borrow money.  Credit card issuers are also seeing an increase in late payments and a slowing in spending.

Higher living expenses are also to blame.  The sharp rise in energy and food prices are taking a larger percentage out of disposable income for many middle and lower class Americans.  The weak dollar has also meant a sharp rise in the cost of imports.  While all this is taking place, there has been little to no wage inflation reported as of yet.

The biggest factor to the slowing of spending may be the economy itself.  As economic growth continues to slow, more and more Americans are becoming worried about the future of their jobs.  January saw the economy lose jobs for the first time in years and many are fearful that trend may continue.

On the first trading day of the new year, oil prices finally broke the $100 barrier, closing slightly below that figure.  Now many people are wondering if this price is sustainable and how much higher energy prices can rise.

Some analysts feel oil could go as high as $120 in the upcoming months.  The future actions of the Fed and the subsequent effect on exchange rates will be a large determinant of this.

Investors also received some gloomy manufacturing data today which fueled renewed recession concerns once again.  Whether this will prompt another Fed rate cut is anyone’s guess but the future’s market is certainly betting on it.

The next few months could be very important to how the economy will play out for the rest of the year.

Key Components To Watch For

• How high will defaults rise?  The majority of the adjustable rate mortgages that weren’t affected by the government’s rate freeze will adjust upward this quarter and we could see defaults surge once again.
• How effective will the Fed’s joint liquidity plan be?  The Fed joined with four other central banks to combat the global credit crunch.  We should start to see some signs if credit markets are easing somewhat.
• How high will inflation rise?  December saw inflation numbers rise higher than what economists were expecting.  If that continues, it may tie the hands of the Fed.
• How will politics affect the economy.  For whatever the reason the market usually loves an election year.  It will be interesting to see if the pattern holds true during these turbulent times.

These are just some of things that will shape the course of the economy in 2008.  As difficult as the last few months were I’d say the Fed has done a reasonable job thus far in keeping the economy out of recession.  It remains to be seen whether they can keep up their balancing act into the new year.