Skip Navigation

Financial Forecast: Partly Cloudy

Some things we can do while we wait for clear skies

There are many indicators watched closely by economists in preparing their economic forecasts; these are just a few:

  • Stock market activity
  • Interest rates
  • Consumer spending
  • Unemployment level
  • Credit card debt
  • Real estate
  • Inflation

    • My review of this data as I see it today yields a partly cloudy forecast, at least for the near term; here’s why.

    Stock Market

    A review of the chart below depicting the Dow Jones Industrial Average reveals that the most commonly accepted financial barometer, the stock market, has been stuck in neutral for the last month. This action follows an 8% drop from its January post crisis high of 10,725.

    You will notice that the rapid decline came after the first of the year, and this concerns me because it indicates that money managers were anxious to "lock in" gains for the year 2010 only weeks into the year. Money managers are paid based on the returns they generate for the funds that they manage, and the fact that they jumped on those returns so quickly may indicate they are not overly optimistic for the year. The market is driven by many factors and it serves as a proxy for our economic health

    Interest rates

    Interest rates are a key economic indicator because they drive the economic engine as they represent the cost of money needed for investment in economic activity. While the Fed recently raised interest rates on the money borrowed from the Fed by the banks, they left consumer interest rates untouched. This may indicate that the Fed is still concerned with the lack of new capital investment by business, and with the continued slow down in consumer spending, particularly for big ticket items. Banks have been borrowing "cheap money" from the Fed and investing the funds in government securities rather than lending it to commercial or individual borrowers. Their strategy has provided risk free profits to the banks (borrowing at rates lower than paid by the government securities they buy with the money), so the Fed is attempting to make that strategy less attractive. The banks may actually have to start lending again to make money.

    Consumer spending

    Both consumer spending and interest rates affect our national savings rate. Last month’s column (Lack of Personal Savings: The Weakest Link) published here, expressed my extreme concern for our inability as a nation to save. Consumer spending has driven the US economy for years, yet we know this cannot continue when such spending is only supported by increasing debt. Therefore, as savings rates have risen marginally over the last quarter, we have seen consumer spending soften. In my opinion, this will serve us well later but in the meantime could have a negative affect on growth.

    Unemployment level

    The terrible unemployment situation is of course interconnected with all major economic indicators. No jobs, no spending; no jobs, no savings; no jobs, no economic growth. Corporations have found the quickest way to improve profits in this economic climate is to cut costs. The quickest way to cut costs is to reduce variable expenditures; and the most significant variable expenditure on most companies’ books is their labor cost. In my opinion, we still have not seen the unemployment picture improve, and it may be several more quarters before such improvement begins.

    Credit card debt

    One of the most troubling aspects of the economic recovery process has been the continued growth of personal debt, particularly credit card debt. Credit card debt is the most expensive debt carried by consumers, and we have continued to see a rise in delinquencies in this debt until just recently. Many banks and savings institutions have been forced to write down or officially recognize this debt as uncollectible, and this in turn has caused some instability in this market sector. Individually, one of the most important things we can do for ourselves is to reduce or eliminate this type of debt. As real estate values further stabilize, I expect another wave of low interest home equity style loans to help alleviate more of the expensive credit card debt held by consumers. Unfortunately, with the decline in real estate values over the last 2 years there is not a great deal of home equity to serve this need.

    Real estate

    The most significant investment held by Americans rests in their homes. The real estate market has been in the forefront of the financial crisis for the last two years, and we continue to see problems in this market in several key areas around the country. Real estate values in Florida, Arizona, Nevada, and California continue to be under extreme pressure. Again, we can see the interrelationship among the economic factors; jobs, savings, interest rates, and personal debt all directly impact the real estate market. There has been some stabilization in certain areas of the country. Frequently, when markets make large moves either up or down, such moves are quickly followed by a correction which brings things closer into balance. I believe we have seen such a correction in real estate in parts of the country, now what remains to be seen is if we continue to stabilize or if we have a further downdraft.

    Inflation

    Most recent government reports as well as private economic forecasts place the inflation risk at a very low level, yet there are signs of increasing costs in a number of market segments. Inflation is of interest and importance because as it increases, it will drive the Fed to begin raising interest rates in order to manage the rate of inflation. We have seen post recessionary inflation get out of control several times over the last 50 years. Hopefully these occasions were lessons learned by the Fed, and the timing and degree of interest rate increases will be fine tuned to the needs of the economy. Again, all of these economic elements are interconnected, so extreme care is needed when attempting to bring any of the elements into balance with any other.

    In summary

    While the outlook is still cloudy and my opinion is that we should remain "defensive" for the foreseeable future, there are things to do while we are waiting for clear skies:

  • Bolster personal savings; if we have none, start now even with a few dollars a week
  • Clean up credit card debt; if we are carrying debt on several cards try to consolidate to one card with the lowest rate and pay ahead if possible
  • If we have equity in any real estate holdings, personal residence included, refinance at the current low rates and put everything possible toward paying down debt
  • If we are in need of major appliances or a new car, look to make those purchases sooner rather than later; it is almost a certainty that some of the best deals will be found during this downturn
  • If we are in a position to invest in the debt or equity markets, seek consultation with a trusted financial adviser; there will be opportunities ahead of the clear skies that signal a full economic recovery.

    • ©Patrick J. Catania 2010
    The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

    We welcome your feedback and ideas regarding this service. To submit a comment or idea for a future article, please email us at member.feedback@bcu.org