Posted by: Kevin | August 20, 2007

Scary Economic News

A couple of stories in economic news caught my attention this morning.

From The Raw Story:

Anxious customers of Countrywide Bank jammed its phone lines, branches and website after the nation’s largest mortgage lender — which owns the bank — announced it was facing problems from a credit meltdown…

“The rush to withdraw money — by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company — came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown,”

Of course Banks do fold and this scene alone isn’t all that Earth shattering.  However combined with this story in the New York Times on Wal-Mart and Home Depot, it paints a picture of sagging consumer confidence.

‘The two companies, the nation’s largest retailers and bellwethers for consumer spending, reported earnings disappointments for the second quarter and predicted an even bumpier year ahead…“It’s a red flag,” said Jay Bryson, global economist at Wachovia. “If consumer spending starts to weaken, the overall outlook for economic growth will diminish.’

This could just represent a hiccup in the economy.  It could just reflect the isolated problems of one bank and two retailers.  However, I’m concerned that it’s more than that.  Wages have been largely stagnant over the past 5 – 6 years.  However, the housing market was booming, allowing homeowners to cash in on the growing equity in their homes.  The housing boom was in part fueled by questionable lending practices by sub-prime lenders.  Now those lenders are folding.

My concern has been, what’s to stop that credit crunch from jumping to consumer lending i.e. credit cards?  You have the same questionable lending practices but on a larger scale.  I assumed it was a matter of time and Wal-Mart’s recent results would seem to confirm that.  That the nations largest retailer, which caters to people in the middle and lower income brackets, can talk about being impacted by the paycheck cycle is at least cause for concern.  I’m not panicing (or shortselling) yet but I’ll most definitely be watching for the next batch of earnings announcements from major retailers.

Hat Tip to Done With Mirrors

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