Consumers are staggering under a record debt load. The surge in oil prices this week to just shy of $40 a barrel, a post-Gulf War high, will reduce the amount of money that's available for spending on non-energy stuff.
The big worry is consumers may no longer provide the enduring support that will get the $10 trillion U.S. economy through the next rough spot.
TROUBLE ON THE HOME FRONT
New residual construction edged up just 0.2 percent in January after jumping by 4.9 percent in December. What was troubling is housing starts fell in major regions of the country, crashing by 16.7 percent in the Northeast and plummeting by 11.9 percent in the Midwest. Sales of new homes plunged by 15 percent in January to the lowest level in a year.
"The housing market is predicted to show tepid growth because of the soft labor market, despite the historically low mortgage rates," says Paul Kasriel, director of economic research at Northern Trust Co. in Chicago.
How bad is the job market? The Labor Department said the number of Americans seeking jobless benefits was the highest in more than two months in the week ended Feb. 22. The jobless claims, which have risen to the recession level of more than 400,000, don't have the footprints of an economic upturn by a long shot.
This is troubling news. The jobless recovery may dampen spending, which could slam the economy back into a double-dip recession.
"Real estate is a horror story in the making, thanks to Fed Chairman Greenspan's artificially low interest rates," James Dines writes in the Dines Letter of Belvedere, California.
The question that's not being asked, according to Dines, is this: Will laid-off workers have difficulty meeting mortgage payments? The job market is exceptionally thin due to the worst hiring slump in 20 years, he says. Worth noting: The number of homes in foreclosure leaped by 23 percent in San Francisco last year.
Nationwide, home loans in foreclosure were at a record high last year. And more people will be forced out of their homes as unemployment rises.
"Job cuts by U.S. corporations leaped 42 percent in December," Dines says. "Firings and layoffs continue to be announced every week."
The outlook is not promising. Manpower Inc., the employment agency, says fewer companies plan to hire people in the second quarter and the hiring trend was the weakest in the Northeast.
The housing market has been one of the few areas of strength in the shaky economy. Rock-bottom mortgage rates have spurred home sales and led to a surge in refinancing of pricier mortgages, which in turn has put more money in consumers' pocketbooks.
Many Americans have also turned their homes into virtual checkbooks, writing a trillion dollars in home-equity loans to pay off high-interest-rate credit cards. This caused household debt to soar to a record $8.5 trillion late last year.
The downside risk to this binge is clear. Borrowers will be in hot water if interest rates on equity loans, which are tied to the Fed's prime rate, start to climb. It happened in 1994 and 1995 when the prime rate went through the roof -- jumping to 9 percent from 6 percent.
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