Economic Recession Looming?

The Dynamic Wealth Report
May 9, 2007

Consumer Constraint
by Brian T Mikes, Managing Editor

The debacle in the sub prime market and the near collapse our real estate industry is experiencing is starting to impact the economy as a whole. Lenders are tightening lending standards and interest rates are creeping upwards.  This is forcing your average every day consumer to stop using his or her house as an ATM and is forcing them to live within their means.

Unfortunately, living within our means is seen by the average American as blasphemy.  Why put off buying to tomorrow what I can borrow to buy today.  However, all feelings and intentions aside, economic factors are impacting spending patterns across the country.  Interestingly the new 6 year high in the stock market is not helping things . . . stocks aren’t apparently up enough to influence buying behavior yet.

Why should you be worried about consumer spending?  Simple.  According to The Wall Street Journal, consumer spending accounts for 70% of all spending.  Any significant change to spending habits will ripple through the economy like a tidal wave.  I hope you have your swim trunks on.

Energy prices are starting to get out of hand.  As a matter of fact gas prices here in San Francisco are nearing $4.00 per gallon.  This is never a good sign, and if you think about it, rising prices in the energy area will certainly have an impact on other consumer goods sales.  The extra $20 or $40 of $60 per week it takes to fill your gas tank is $20 or $40 of $60 less you have to spend on other discretionary items, like flat screen tv’s.

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Now get this . . . Circuit City Stores announced this week that they have experienced weak demand for flat screen tv’s and Sears, Wal-Mart, and Target all announced noticeable concerns about consumer spending.  Now I don’t know about you but I know a lot of people who shop regularly at those three stores (Sears, Wal-Mart, and Target) and if they are seeing a slowdown, its probably not something limited to a specific part of the country.

So the storm is brewing . . . energy prices are up, borrowing money is getting harder, the value of peoples houses is flat or falling, and now everyone is spending less. . . . sounds like the start of a recession to me.

•  Ethanol (Surprisingly flat!)

Ethanol futures that are traded on the CBOE have been surprisingly flat over the past two weeks in the face of volatility in corn futures.  Concerns over weather and slow planting schedules sent corn prices higher a few weeks ago and in the last week announcements of a catch up in the planting cycle sent corn lower. Interestingly, this volatility has been noticeably absent from the ethanol market.

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