Going into the 4th quarter, where is the economy headed?

Where are we in the economic cycle right now?

Economic growth slowed to 2.6% annual real rate in the second quarter as measured by gross domestic product. Clearly, the Fed’s 17 rate increases are starting to cut into economic growth. Plus the higher oil prices cut into consumer spending over that quarter.

The job report numbers for September was a very anemic 51,000 new jobs. But one month of data isn’t very accurate. If you look at a couple months and average them, you get a better picture. Job growth was 123,000 in July and 188,000 in August. An average for the last three months is about 121,000. Most economists believe we need create about 135,000 to 150, 000 new jobs a month for new people entering the market to find jobs and we aren’t doing that right now. Employment Situation Summary

The housing market has slowed too. Will it be a crash as some predicted? Some of these stats are quite alarming and would lead the reader to believe we are doomed to a hard landing, which will likely lead to a recession. However, others believe since fixed mortgage rates have continued to decline, people will be able to refinance at a low fixed rate and that will cushion the housing slowdown. In addition, the easing of oil and gas prices can offset the some of the impact of the housing slowdown.

There is a correlation between a negative yield curve (the short rate yield (91 day) is higher than the long term rate(30 year)), and a looming recession. The more pronounced the negative yield the more likely it is that we will have a recession. Right now, it looks as we will only have a slowdown since we have a flat yield curve. Current Bond Rates

Despite all this information, one member of the Fed, Jeffrey Lacker, is still worried about inflation and wants to continue tightening the money supply. IMO he is out of touch. If we followed his recommendations, we more than likely go into a recession. IMO and Bob Brinker’s (he has the best money show on radio), the Fed should focus on trying to stimulate economic growth, not concern itself with higher inflation in an economy that is softening.

Going forward, I see Fed lowering the federal funds rate to below 5 percent sometime next year. I don’t see them making a move in October right before an election. I’d like them to lower the federal funds rate in October, but I don’t see it happening.  I see a slowdown but don’t see a recession coming. With the low unemployment rate of 4.6%, low mortgage rates, and oil prices dropping I think the housing market is going to have a soft landing.  A real estate  correction in most areas is long overdue. I don’t see a crash that some predict. Some areas where speculators went wild will face hard times and speculators who thought they were going to make easy money will lose big money. 

Overall people who bought their home to live in (and not as an investment) will most likely be fine in most areas. We had a great run and its time for a correction and a little pull back to get prices in order.

For the overall economy, I see slower growth overall but continued growth. I don’t see a recession. If you look at the S&P 500 valuation, it doesn’t look that expensive. Factoring in the current year-over-year consumer price index inflation rate of 3.8% along with current interest rates, the future fair value of the S&P 500 Index is within a range of 16.5 times 2007 operating earnings. That isn’t too bad.