What can we expect from the economy next?

“Record Credit Card Losses Force Banks Into Action” – Financial Times, July 1, 2009
“Echo Boomers a Lifeline for Embattled U.S. Housing” – Reuters, June 22, 2009

These two very different quotes foretell what we can expect from the economy in the months and years to come. The first, obviously, is that the economy remains very weak. The Financial Times writes, “Losses on U.S. credit cards hit a record of 10.44 per cent in June, squeezing profit margins for credit card securitizations to a 10-year low…”

This is troubling for two reasons. First, the American consumer is the engine that drives the U.S. economy. And rising credit card losses imply that the American consumer is still struggling with debts. Needless to say, shoppers who are having trouble meeting their existing obligations are not going to run out and buy a new car or big-screen TV this month.

The second reason that this quote is troubling is that the root of this recession was in the credit markets. The implosion of the subprime lending bubble caused the banking sector to get wiped out. Banks bundled low-quality mortgages into pools, and through the “alchemy of finance”, created investment grade securities out of junk. When this model failed, it took the banking system down with it. So, when we see that banks now face troubles from credit card pools, we find plenty of cause for alarm. This recession is not over because the roots of it have still not been fully fixed.

With that said, we do find cause for hope in the second quote above. Reuters writes, “Echo boomers, the children of the post-World War Two baby boomer generation, offer a massive source of support for housing, the [Harvard]study said. The generation is entering the peak home buying and renting ages of 25 to 44 and numbers over five million people more than did their parents’ record-sized group in the 1970s.

Harvard University has made a point that economists like Harry Dent have been making. The housing markets will eventually get better, particularly in the lower-end markets. The massive wave of children born just before and just after 1990—the generation currently in college or starting their careers—will soon be looking for apartments and starter homes. The recovery will not be instant, of course. But the good news is that buyers for many of the homes currently on the market or in foreclosure will eventually come forward.

The prognosis is not as favorable to “McMansions,” the homes of choice for many wealthy Baby Boomers. But the 5-to-10-year outlook does indeed look good for the starter home market.

If you aren’t sure how all of this news about the U.S. economy affects you and your financial future, give me a call. I’d be happy to give you a complimentary consultation to discuss your individual situation.

Sources

Scholtes, Saskia. “Record credit card losses force banks into action.” Financial Times, July 1, 2009. Link: http://www.ft.com/cms/s/01/c8b55d4-65d4-8e34-00144feabdc0.html

Adler, Lynn. “Echo Boomers a lifeline for embattled US housing.” Reuters, June 22, 2009. Link: http://www.reuters.com/article/ousiv/isUSTRE55L0AO2009622

“Record Credit Card Losses Force Banks Into Action”

Financial Times, July 1, 2009

“Echo Boomers a Lifeline for Embattled U.S. Housing”

Reuters, June 22, 2009

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