As The Economy Turns

Don't look now, but I think the economy just hit the turn.

At some point the economy is going to retract. It's not a matter of if it is a matter of when. I think it just took a turn for the worse. Here is why.

1. Consumer Confidence has plummeted. This doesn't always translate into consumers spending less but I think this time will be more predictive than past times where consumers kept spending despite their drop in confidence in the economy.

2. Oil prices keep rising - Despite the drop in demand recently, the price of oil is still very high and looks to be rising. Higher energy cost inevitably hits consumers very hard. Not only does it increase what they pay at the pump, it increases their cost across the board for the products they buy.

3. The Yield Curve is almost flat - A flat yield curve is bad. An inverted yield curve is almost always a predictor of an upcoming recession. The Fed will continue to rise short term rates and I don't see the 10 year bond moving any time soon, it has barely budged despite continued hikes by the fed. Within months, the curve could easily invert itself.

4. Home Sales declined - While it is only a month, this had to happen sooner or later and I believe we finally may have reached the point where the bubble is about to burst. You add this to the fact that Greenspan released a report he authored (this is in itself VERY rare as he has only done it TWICE in 18 years) that shows much of the consumer spending of the last few years was based on consumers taking out equity in their home. Consumers can't continue to do this forever so a decline in consumer spending is inevitable.

5. Consumers are stretched too thin - There is a report out today that credit-card deliquencies rose sharply over the last few months. Much of this is attributed to the rise in gas prices. However, this points out a much deeper problem. Americans have saved very little money over the past several years, feeling the wealth effect of rising home prices. However, this is not cash in the bank and therefore, when times get tough, people are stretched too thin. What is even scarier is that the numbers are for April-June only. This does not factor in the Katrina effect and the record price of gas over the last few months.

Maybe I'm just paranoid and overly pessimistic. That's the beauty of the blog. You can come back in a few months and see if I'm an idiot or a genius.