from the AmyBSells Chief Economist Ryan Detrick

I think it is important for those who read this blog to look at the economy on a broader scale and understand that housing affects many other parts of our economy, and is affected by many other parts of our economy. These things should be considered when understanding the market as a whole. To do this, I have recruited a client and friend of mine who knows the market very well, all aspects, and he does not focus on housing. If you read his bio, he is something of a celebrity appearing weekly on television for his thoughts on the economy and the stock market. I think that my clients and readers of my blog should have nothing but the best, so I give you, Ryan Detrick, AmyBSells Chief Economist extraordinaire…

Let’s talk about the economy. As we all know things aren’t that great, but is it really that bad? Well, two weeks ago ex-Fed President Alan Greenspan put it simply, “the US economy is on the brink of recession.” Yes, housing and banking have been without question two of the weakest areas – but manufacturing has held up extremely well and consumer confidence is slowly improving. This coupled with an economy that lost 51,000 jobs last month – and in my opinion you have a weak, but not collapsing economy.

Taking a closer look at the economic data – manufacturing has remained strong. Much of this is due to the lower US dollar and strong foreign demand. In fact, earlier this month the ISM manufacturing survey came in at 50.0 – suggesting flat growth over the past year. Anything over 50 suggests growth and this number was much better than expected. Personal spending remains strong and the recent consumer confidence survey showed steadily increasing confidence. Given consumer spending is nearly 70 percent of overall GDP – we need consumers to continue to spend to keep our economy afloat.

On the downside, we have year-over-year inflation growing at nearly five percent (a two decade high) and GDP growth in the second quarter of only 1.9 percent. When inflation is growing faster than what you can make in a money market (around 2 percent), economic conditions are tough – plain and simple. And finally, with oil about 60 percent higher than it was a year ago, the ‘oil tax’ is alive and well and hurting everyone.

Last week the Fed kept short-term interest rates at 2.00 percent. Earlier in the year the consensus was they would be forced to increase rates, but as the economy continues to muddle along – this isn’t the case. In fact, last week the Fed took a more neutral tone in terms of what they plan on doing with rates (meaning they aren’t looking to hike or cut rates anytime soon). There are two schools of thought in regards of interest rates. One, the Fed needs to increase rates to thus prop up the US dollar and this should push oil lower (remember the dollar and oil trade inversely). The other school of thought is they should leave rates where they are to potentially spark the weakening economy. Without a doubt the Fed is in a tough place, but my personal opinion is they should leave short-term rates at 2.00 percent and stop worrying about oil and inflation. As long as we continue to see banks going under and weak housing numbers, their main concern needs to be improving the overall economy. Also does anyone really expect higher interest rates during an election year? I for one don’t.

The bottom line is things aren’t good for the average US consumer. With higher inflation, higher oil, a slowing economy, and a weak stock market – things are tough out there. One thing to remember is we’ve had recessions before and we’ve always come out of them stronger than we were before. I don’t expect the current environment to be anything different.

About Ryan Detrick

Ryan Detrick, CMT, is the Senior Technical Strategist at Schaeffer

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