We’re coming into the heart of earnings season and also into a new round of economic numbers this week, which will give us a better idea of just where things might be headed for the economy. So far it looks like recovery is on track even though employment is lagging in the US in particular, but there’s still the question of whether consumers are really getting their hearts into the holiday period or simply saving one place to spend in another with less overall positive spending growth as a result.
The mortgage situation is a troubling factor. The flood of foreclosures created a flood of shortcuts in the handling, and now it appears that the process was violated. Since that process is a statutory requirement for foreclosing, a problem here creates a cascade effect, and some of the lower-tier impacts could hurt.
The top of the pyramid isn’t bad; foreclosures might be limited or halted for the time it takes to get the paperwork legally straight. That would delay entry of homes onto the market, keep people in their homes longer, and otherwise do fairly good stuff. But for homes already foreclosed, it clouds the title the banks can give to purchasers. That means title insurance may be impossible, making mortgages difficult. That could slow the housing process down, given that foreclosed homes make up nearly a quarter of current-period sales in some areas.
Another question is whether the combination of the credit crunch and stalled spending plans might not be reducing liquidity in the economy overall, thus contributing to what’s called “deflation” or an effective decrease in the cost of goods and services that’s caused by money appreciation. Deflation typically stagnates economic growth, in part by encouraging deferring of spending to a future time when stuff will be even cheaper.
If we (somewhat simplistically) say that inflation is excess liquidity in the economy and deflation is insufficient liquidity, then the classic mechanism to fix deflation is to do something inflationary like reduce the Fed rate to increase the money in circulation. When that’s not possible because of pre-existing reductions that have taken the rate to near-zero, the next step is “quantitative easing”, in which the Fed prints money (in effect) and uses it to buy debt, usually its own bonds. That gets new money into circulation and hopefully increases overall liquidity.
Some of the problem with liquidity today is likely created by cautious consumer spending and tight credit, and the flight of investment dollars offshore to developing markets with higher returns is another factor. All of these factors can be reduced with a resumption in growth, but it’s the classical Catch-22 and that’s what the Fed hopes to break with additional asset purchases. This is a good time, I think, because it corresponds to the holiday period when there’d normally be a bit of an uptick in consumer spending. But it’s clear that the Fed isn’t 100% sure how much if any is needed or they’d have acted already to get ahead of the curve.
There is some information to suggest that businesses may be holding to their 2010 IT spending, but the 4Q pattern will tell the tale since there’s a larger un-spent budget excess than normal coming out of 3Q according to the survey data we’ve collected so far (which isn’t complete, so it’s suspect). That will be released if economic trends continue to show some improvement, and it will also impact budget planning for next year. If we win in 4Q we’ll win in 2011 overall, in short. This week’s data may tell the tale.