h the recent Consumer Confidence Index number, which has dropped to 37.7 so far this month. To put things into perspective, about a year ago, that number stood proudly -- or foolishly, depending on how you look at it -- at 87.
Economists agree that we are going to remain in this financial purgatory until fundamentals start gaining momentum. Unfortunately, two of the major drivers of economic recovery and growth -- housing and employment -- are not likely to recover anytime soon.
To illustrate, according to the U.S. Labor Department, state unemployment rates catapulted to new highs in December, with Indiana and South Carolina leading the pack. Additionally, the S&P/Case-Shiller Housing Index, which measures house prices in 20 U.S. cities, has dropped a record 18.2% in November compared to the same period the previous year.
Aside from huge bailout packages that are already in the works, U.S. policymakers are trying to identify more tools to jumpstart consumer spending and revive lending. Interest rates are definitely going to stay low for quite some time, but they're not enough. Without resurrecting the American consumer, quite possibly there might not be a way out. Remember that, in recessions past, it was the consumer who saved the day.
Unfortunately, U.S. policymakers won't be able to get much help from the global economy. It doesn't take a rocket scientist to figure out that 2009 is going to be known as a global recession year. In 2009, global growth is expected to slow down to just about 1.4% from the 3.6% tallied for 2008. An unofficial range for global economic growth is between 2.5% and 3.0%. And amidst all that slowdown, financial markets remain extremely fragile, both reflecting and importing significant risks imposed on capital-starved businesses and households.
Basically, since 2007, the Fed has tried to fight the adverse effects of economic weakness and financial market woes. The key interest rate has plunged 500 basis points to just about 25. Things have become progressively desperate as the credit and financial crises have become progressively worse. To augment market liquidity, the Fed, together with Treasury, created the Trouble Asset Relief Program (TARP). At some point, it will all start to look as if the Fed is out of ammo.
But the Fed begs to differ. The central bank has decided to focus on buying various troubled assets at various maturities, structuring them in such a manner that these assets would serve the purpose of lowering correlated market interest rates. This is also referred to in economic terms as "quantitative easing." The Fed plans to keep on doing that until financial markets regain their functionality and before the Fed starts weaning the market from its balance sheet. However, the re-normalization of credit and financial markets and eventually the U.S. economy is not really expected before the first quarter of 2010.
Profit Confidential
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About the author
Inya Ivkovic, BA, MA, Senior Editor at Lombardi Financial, is the editor of Explosive Mine Stocks, Bio-Tech Breakthroughs and Payload Stocks. She is co-author of The Revenge to Riches Strategy: How You Can Profit from the Secret Greenspan Plan. Before joining Lombardi, Inya held several positions with large North American financial institutions, and has been an academic specialist for a securities institute, a trader, and an investment advisor. Inya's diverse market background and passion for stocks delivers an institutional perspective to Lombardi Financial readers.
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