In my last article I highlighted the problems the economy faces going forward. I mentioned the deteriorating housing market, commodity inflation hemming the Federal Reserve in, weakening employment and decreasing corporate profits. Below I will highlight what to watch for going forward to see how the overall economy is doing.
Housing
From the housing market, keep a close eye on several statistics.
1.) Overall inventory and months of inventory available for sale. Right now the absolute inventory available for sale is at incredibly high levels. I call it a super-glut. Simply put, there are a ton of homes on the market. As this number increases, expect more downward pressure on home prices. In addition, keep a close eye on months of inventory available for sale. This is how the existing sales pace of existing homes is measured. Right now that number is over 10 months, which is a ton of homes.
In addition, keep your eye tuned into foreclosures. The main issue with real estate right now is inventory. Anything that adds to inventory is bad and anything that subtracts from inventory is good. Foreclosures are also at high levels indicating the absolute amount of homes available for sale is increasing, adding further downward pressure on home prices.
Finally, watch for information related to the credit markets. There are two things to watch for.
2.) Writedowns. Most estimates that I have seen say total writedowns will fall between $300 and $500 billion. According to a recent Bloomberg article, that total amount of writedowns is now just below $100 billion. Assuming the low end of the estimated amount of writedowns is accurate, we still have another $200 billion of writedowns to go. The first $100 billion in writedowns has taken six months. Assuming the same pace of disclosure going forward, we have at least a year left of negative announcements from the financial sector.
3.) The credit crunch. Every Thursday, the Federal Reserve issues a report on the short-term credit markets. The report is available from their website. These are becoming increasingly important numbers.
My hope for 2008 is that by the end of the year housing and the credit markets will at least be stabilized.
Federal Reserve
The main issue here is commodity inflation. Agricultural and oil prices are in the middle of three year and one year rallies, respectively. These developments are starting to get the attention of the Federal Reserve. At the last FOMC meeting, the Fed lowered interest rates 25 basis points when the market was expecting 50. To aid liquidity, the Fed began an open market operation. In my opinion, the Fed opted for this second option to help the credit markets because of inflation; they couldn't risk lowering interest rates further without adding to the possibility of increasing inflationary pressures.
Consumer
The final Christmas sales numbers will be very important. They should be released at several levels. Watch the big retailers -- Wal-Mart and Target being incredibly important. Also watch the numbers coming from the Census Bureau.
Also keep an eye on gasoline and food prices. These have gotten a lot of exposure lately because economists are arguing that higher commodity prices are starting to lower discretionary spending.
Corporate Profits
The first quarter numbers will be coming out soon. Last quarter was the first time in about five years that corporate profits were lower from the previous quarter. If this happens again -- that is, if corporate profits again disappoint -- than traders on Wall Street may become less inclined to bid-up shares. If the market drops, consumer confidence will take a hit, which will in turn probably decrease consumer spending.