Friday, November 2, 2007

Evidence of stagnation accumulating in US economy

The Federal Reserve said it was going to happen: 'The pace of economic expansion will likely slow in the near term.' And despite the healthy-looking 3.9 pct third-quarter economic growth, evidence is accumulating that the 'near term' the Fed referred to -- only yesterday -- has turned into 'now.

'First of all, there are the just-reported slowdowns in consumer spending and manufacturing.

US consumers pulled back noticeably in September. Real, inflation-adjusted consumer spending rose just a tenth of a percentage point and according to Nigel Gault at Global Insight 'retailer reports for October suggest that the fourth quarter began with little momentum.' Take-home wages are still growing but rising gasoline prices are reducing spendable income and falling house prices are cutting consumers real wealth.

'Consumer confidence is sagging badly,' warned Merrill Lynch's (NYSE:MER) (OOTC:MERIZ) David Rosenberg, in both the University of Michigan and Conference Board surveys. In the latter, 'confidence is now down more than 16 points in the past three months, which is the sort of decline one sees happen once every three years at most and in the past, this did have a pretty good track record at tracking recession (though clearly not always).

'The ISM manufacturing index for October was down to a seven-month low at 50.9, just barely above a neutral 50 reading, and businesses said they were seeing housing and financial market spillovers.

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