Archive for the ‘Deflation’ Category

The recession is over… right?

November 4, 2009

The numbers are out. The last quarter saw the GDP grow by 3.5%.  That means the recession is over and it’s time to party!!

Or is it?…

GDP growth is a great way to measure the state of the economy, but unusual circumstances (such as the $600 government rebate check in Q2 2008 or “cash or clunkers” in Q3 2009) can mask actual deficiencies. Moving forward, there are some other areas that one would like to see some improvement.

  • Jobs – While job creation typically lags behind an economic recovry, seeing fewer jobs being shed month-to-month would encouraging – September had more overall jobs lost than August.
  • Home values and sales – The housing market is slowly stabilizing and home sales are increasing month-to-month, but we are not there yet.  When people feel confident in their job, they are more likely to make bigger purchases (homes, cars, etc.).  Until the job market rebounds, the housing market will continue to struggle.
  • Inflation – This has definitely not been problem during the current recession. Inflation figures are below 0% and have NOT given way to major deflation.  Ironically, mild inflation can be viewed as a good thing for the economy. It shows that people are spending/investing money.  When year-over-year inflation figures are below 0%, it means people are not spending/investing money. That is not the best scenario for an economy primarily based on…
  • Consumer Spending – Whether you like it or not, consumer spending comprises 60-70% of the U.S. economy.  There was a 3.4% growth in consumer spending in the last quarter, but some of the growth is attributed to the “cash for clunkers” program. It will be telling to see how consumers behave as we move into the holiday spending season.
  • Stocks – Wall Street has roared back after falling to decade lows in the market.  Even though the market is still volatile, the recovery in stocks has been a much needed boost.

Is the recession over?  While there have been great strides made, in the words of Obama and others… “we’re not out of the wood yet.”  These other areas need to see improvement too if we truly want to see an end to the longest and deepest recession since the Great Depression.

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Whoever wins… we lose

February 3, 2009

That was the tagline of the famous/infamous (depending on your point of view) movie “Alien versus Predator” from 2004.  Take a look at that picture.  Talk about ugly.  On that note, there are two other equally ugly and possibly terrifying things in the news that regardless of who wins out, we all lose – inflation and deflation.

For now, inflation is definitely not a factor in the market.  The closely watched Core Personal Consumption Expenditure Index (Core PCE) came in at 0.0% for January.  This left the year-over-year Core Rate at 1.7%, which is well inside the Fed’s preferred range of 1 – 2%. 

I bet if inflation and deflation were each given a face, they would look about as scary as these two characters.

I bet if inflation and deflation were each given a face, they would look about as scary as these two characters.

 

It seems the “scary” inflation news from just a few weeks ago was slightly exaggerated.  While there could be some issues with inflation toward the end of 2009 (impacts of all the stimulus attempts, low interest rate environment, and the Federal Funding Rate virtually at 0%), it is definitely not something that needs worrying about today. 

 

But in this market, what is a day without worry?  Thankfully, we have deflation to keep us up at night.  What is deflation?  Investorwords.com defines inflation as:

          A decline in general price levels, often caused by a reduction in the supply of money or credit.

          Direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending.

          The side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.

 

I know what you are thinking, “declining prices, that is good, right? So why is deflation bad?

 

We all know inflation is a bad thing and the Feds meticulously fight against it.  If you don’t believe me, Google “inflation calculator” and play around with some of the calculators you can find online.  If you do, you’ll discover that it takes almost $2 to buy the item that was just a dollar twenty years ago.  At this rate, that means the today’s $50,000 Lexus will cost $100,000 in 2029!  Inflation means spend today because it will cost more tomorrow. 

 

So inflation is bad, but is deflation worse?  Actually, yeah, it is.  Deflation kills the overall economy.  There is no incentive to spend today since prices will be cheaper tomorrow.  This destroys product sales and increases unemployment, which in turn intensifies this downward spiral.

 

Monday’s economic reports offered proof of deflation.  Consumer spending fell for the sixth consecutive month to -1.0% and rose just 3.6% in 2008 – the smallest gain in nearly 50 years.  Another report showed Personal Income fell by -0.2%.  Americans increased their savings rate to 3.6% of their after-tax incomes in December.  While saving is a good thing, it’s not a good thing for our consumer spending based economy. 

 

Couple high unemployment rates with the summary of those reports – lower energy prices, decline in investment spending, and reduced consumer spending – and you get signs that all point to deflation.

 

How does this affect interest rates?  From reading this blog, we all know that inflation hurts mortgage rates, but what about deflation?  Deflation is bad for economy, which is good for rates.  However, deflation also causes loads of volatility in the market, which creates an uncertain environment for all parties involved (stocks, bonds, rates, etc.). 

 

Anyone looking to buy a home should find a lender that has a float-down option on a rate lock.  If rates improve, use the float down option to make up the difference.  If you are in the market for a refinance, talk to a professional that watches the markets to find your ideal target refinance rate and time to lock in that rate!

 

Inflation and deflation… they are both a pain to deal with, and it isn’t like one is better for the economy than they other.  Regardless of who wins, the economy loses.

 

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.