Warning! Bad Economic Trend Ahead

There are two things that need to improve for the economic engine to really start to hum. Those things are real estate property values rising and more liquidity into the credit markets. Although we are technically no longer in an economic recession, many would agree that the engine is stuck in neutral. Let us take a look at where we are on these two important economic attributes.

This was certainly not the first recession we have experienced and unfortunately will not be the last downturn. The backbone of the US economy is the small business owner. The bell weather metric to assess investment in this important segment is the flow of money measured by commercial and industrial loans. After a period of steady growth since August 2010, it has hit an unexpected downturn that is a huge warning flag.
(See Chart).

After a hint of reaching the proverbial bottom in recent months, the housing market is flirting with yet another decline as inventories continue to rise. (See Chart). Companies have all but abandoned relocation packages that have effectively put the brakes on the talent pool. Homeowners are faced with difficult choices as they seek to grow their income and careers. What is the value of a FICO score? Is a 20% pay raise worth a damaged credit score? The American dream of home ownership has the unintended consequence to freeze talent.

Until we begin to see dramatic increases in the flow of money into the small business sector, there will not be meaningful acceleration in the Gross Domestic Product. Business owners have shown a reluctance to take risk in an environment where the cost of borrowing is extremely favorable. Likewise, the data suggests we are a long way from purging our housing market of toxic assets. Given that mortgage rates are at historical lows, the housing issue has more to do with consumer confidence than market value.

Regardless what the pundits may be saying about the holiday spending compared to last year and what that may suggest about consumer confidence, the current trend is ominous. In the immortal words of the Lost in Space robot "Danger Will Robinson, Danger!"