Economy | - Part 10

The Reuters/University of Michigan consumer sentiment index plunged from 63.7 in July to 54.9 in the first of two readings for August as the debt ceiling debate, U.S. and European credit concerns, and tumbling stock prices drove the index to its lowest level since 1980.

As shown below, during the worst of the financial crisis in November of 2008, this index fell only as far as 55.3, so, along with renewed volatility on Wall Street, count this as another indication that the months ahead could be perilous.

The expectations component dropped from 56.0 in July to a near-record low of 45.7 in August and the gauge of current economic conditions fell from 75.8 to 69.3. Moderating gasoline prices saw inflation fears easing, the one-year outlook for consumer prices steady at 3.4 percent while five-year inflation was seen at 2.9 percent.

Coming on the heels of this morning’s better than expected report on retail sales last month, you can’t help but wonder if Americans have decided to adopt the attitude of “Eat, drink, and be merry, for tomorrow we may die”.

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The Commerce Department reported(.pdf) that, after the slowest three months of spending in almost a year, Americans pulled out their wallets again in July and pushed retail sales up by 0.5 percent in gains that were broad-based.

Paced by gasoline station sales that rose 24 percent, overall sales were up 8.5 percent on a year-over-year basis in a data series adjusted for seasonal variations, but not inflation.

Auto sales rose 0.4 percent in July after a gain of 0.7 percent in June, continuing to rebound after supply disruptions in Japan during the spring. Excluding autos, sales were 0.5 percent higher last month after an upwardly revised gain of 0.2 percent the month before.

Despite moderating prices, gasoline sales rose 1.6 percent in July after dropping 1.7 percent in June and sales excluding both autos and gasoline rose 0.3 percent after a gain of 0.5 percent.

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Consumer Confidence Continues to Plunge

A new Gallup survey shows that consumer confidence has plunged to its lowest level since March of 2009. Apparently, the U.S. credit downgrade that followed a messy debt ceiling debate, both of which led to a plunging stock market all contributed to the souring mood.

On a related (and equally dismal) note, Rasmussen reported that nearly 70 percent of Americans think we’re still in a recession, this reading down only slightly from the time that the recession officially ended just over two years ago.

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Bernanke! Do Something!

It would appear that the magic elixir of a two-year pledge for freakishly low interest rates from the Federal Reserve has an effective life of only about 18 hours since, after yesterday’s remarkable 400+ point move higher for the Dow Jones Industrial Average, that gain has been reversed in trading today, markets effectively telling Ben Bernanke and the rest of the staff at the central bank, “What else you got?”

Recall that, yesterday, the Fed fired off the first of a possible three shots that could be seen prior to what some analysts predict will be another $1 trillion or so in outright money printing to buy government debt or some other asset that, if all goes well, would goose the markets for another six months or so, just like it did last year.

After the low rate promise yesterday, what’s likely to be heard next from the Fed is: a) they intend to lower the interest paid on excess reserves to compel banks to lend a little more, or b) they’re going to fiddle with the two trillion dollars in assets they’ve purchased in recent years to somehow convince somebody to do something that would somehow right the quickly sinking ship.

Neither of these steps are likely to have a more lasting impact than yesterday’s move, so, what we’re really looking at here is either the Fed can embark on QE3 and, if all goes well, boost asset prices until mid-2012, or they can sit on their hands and watch the stock market fall further while the jobless rate rises.

Based on the three dissenting votes for yesterday’s action, any subsequent moves by the Fed will be met with similar disapproval by some voting members, however, that’s not likely to stop the doves from printing up another trillion dollars or so for the greater good.

After yesterday’s baby step in that direction, Goldman Sachs said today that QE3 sometime later this year or in early-2012 is now likely and, based on how markets are moving today, it’s hard to disagree with that view, the only variable seeming to be the size and the timing.

With the Dow now closing in on bear market territory while other stock indexes have already breached that level, you’d think that it won’t take too much more of this for the Fed to act. Moreover, the only way that we’ll likely make it to the Jackson Hole group therapy session in two weeks (where a major policy initiative could be announced) without an even more severe breakdown in equity markets is if all the Fed doves start making speeches about QE3 – when, how much, and how they see this as the best of a handful of policy options.

They’re probably already working on those speeches…

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