It's Joe Six Pack that should be receiving the benefits of any tax cuts, they're the ones maintaining the economy, not the rich.
Joe Six-Pack Calls the Economy's Shots
Sat Mar 1, 7:13 AM ET Add Business - Reuters to My Yahoo!
By Pierre Belec
NEW YORK (Reuters) - If the economy unravels and Joe Six-Pack stops buying beer, get ready for an unpleasant cycle that won't bode well for the stock market.
For more than two years, Federal Reserve Chairman Alan Greenspan has kept Joe and other American consumers in a happy frame of mind by chopping interest rates. The scary thing is Greenspan may have little wiggle room left, with the cost of borrowing already cut to a 40-year low and consumer confidence souring.
The Fed, with rate cut after rate cut, has encouraged consumers to spend and keep the economy afloat. While corporate spending has dried up, consumers have done the heavy lifting with shopping sprees that generate two-thirds of the nation's growth. Dirt-cheap mortgage rates created a housing boom.
The process worked because people still had jobs. Now that the economy is growing at a stall speed and the job market is the poorest in decades, Joe Six-Pack is becoming a lot more pessimistic.
LOOKING DOWN $40-A-BARREL OIL
Consumer confidence sank this month to the lowest level in nearly a decade. People are scared. It's only a matter of time before the gloom translates into a major drop in spending.
The Conference Board, a private business research group, said confidence fell for the third month in a row as Americans worry about holding onto their jobs, wealth-destroying financial markets, rising energy prices and the threat of war with oil-rich Iraq.
Going forward, risk perception will have the greatest impact on the economy.
Consumers are staggering under a record debt load. The surge in oil prices this week to just shy of $40 a barrel, a post-Gulf War high, will reduce the amount of money that's available for spending on non-energy stuff.
The big worry is consumers may no longer provide the enduring support that will get the $10 trillion U.S. economy through the next rough spot.
TROUBLE ON THE HOME FRONT
New residual construction edged up just 0.2 percent in January after jumping by 4.9 percent in December. What was troubling is housing starts fell in major regions of the country, crashing by 16.7 percent in the Northeast and plummeting by 11.9 percent in the Midwest. Sales of new homes plunged by 15 percent in January to the lowest level in a year.
"The housing market is predicted to show tepid growth because of the soft labor market, despite the historically low mortgage rates," says Paul Kasriel, director of economic research at Northern Trust Co. in Chicago.
How bad is the job market? The Labor Department said the number of Americans seeking jobless benefits was the highest in more than two months in the week ended Feb. 22. The jobless claims, which have risen to the recession level of more than 400,000, don't have the footprints of an economic upturn by a long shot.
This is troubling news. The jobless recovery may dampen spending, which could slam the economy back into a double-dip recession.
"Real estate is a horror story in the making, thanks to Fed Chairman Greenspan's artificially low interest rates," James Dines writes in the Dines Letter of Belvedere, California.
The question that's not being asked, according to Dines, is this: Will laid-off workers have difficulty meeting mortgage payments? The job market is exceptionally thin due to the worst hiring slump in 20 years, he says. Worth noting: The number of homes in foreclosure leaped by 23 percent in San Francisco last year.
Nationwide, home loans in foreclosure were at a record high last year. And more people will be forced out of their homes as unemployment rises.
"Job cuts by U.S. corporations leaped 42 percent in December," Dines says. "Firings and layoffs continue to be announced every week."
The outlook is not promising. Manpower Inc., the employment agency, says fewer companies plan to hire people in the second quarter and the hiring trend was the weakest in the Northeast.
The housing market has been one of the few areas of strength in the shaky economy. Rock-bottom mortgage rates have spurred home sales and led to a surge in refinancing of pricier mortgages, which in turn has put more money in consumers' pocketbooks.
Many Americans have also turned their homes into virtual checkbooks, writing a trillion dollars in home-equity loans to pay off high-interest-rate credit cards. This caused household debt to soar to a record $8.5 trillion late last year.
The downside risk to this binge is clear. Borrowers will be in hot water if interest rates on equity loans, which are tied to the Fed's prime rate, start to climb. It happened in 1994 and 1995 when the prime rate went through the roof -- jumping to 9 percent from 6 percent.
WATCH THE SAVINGS RATE
One of the best clues that American consumers are not feeling as good about their finances as they once were can be found in the steady increase in the personal savings rate. In the last quarter of 2002, consumers socked away 4.3 percent of their income, the largest amount since 1998. A year earlier, when confidence readings were higher, people saved less than 1 percent of their paychecks.
The downside for Wall Street? The more money people squirrel away, the less likely they will make new investments in the stock market. It's also bad for the economy because the more they save, the less they'll spend on stuff that will stimulate growth. So don't look for the bad market to end until the uncertainty is removed.
Unfortunately, more rate cuts by Greenspan would only extend the vicious cycle by encouraging consumers to take on more debt.
The other risk is cheaper money would stoke an already inflated housing market and create long-term risk for the economy.
Then there's the fiscal health of the state and local governments, which is deteriorating at a fast clip.
For the last three years, the headlines focused on the tremendously negative reverse wealth effect on the average household from the head-spinning drop in the stock market. But the damage to state governments' coffers has been just as harsh.
"The deficits in state budgets are so severe that politicians will naturally look for higher taxes -- nullifying President Bush's federal tax cuts," Dines says.
For the week, the blue-chip Dow Jones industrial average fell 1.58 percent to end Friday at 7,891.08, while the tech-laced Nasdaq Composite Index slipped 0.85 percent to close at 1,337.52, based on the latest available figures. The broad Standard & Poor's 500 index finished Friday at 841.15, down 0.82 percent for the week. (Pierre Belec is a free-lance journalist. Any opinions expressed are those of Mr. Belec.)
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