Friday, August 31, 2007

Consumer Confidence Index--August

The Reuters/University of Michigan August Consumer Sentiment Index came in at 83.4, markedly lower than July's unexpected high of 90.4.

Good economic news this summer has been eclipsed by the worldwide impacts of subprime mortgage defaults in the U.S. Central banks from here to Britain are still busily loaning money to institutions that uniformly claim sufficient liquidity. Barclay's has claimed that a "'technical breakdown' in the UK's clearing system forced it to borrow £1.6bn from the Bank of England."(source)

This morning the New York Times reports that "Freddie Mac, the nation’s No. 2 buyer and backer of home mortgages, set aside more than $300 million in the second quarter to account for bad loans, contributing to a 45 percent drop in profit."

Consumers have enthusiastically used home equity to continue spending. Consumer spending accounts for two thirds of economic activity. Numerous "homeowners" are now flipped, owing more than their homes' current market values.

The big question: what will happen when consumers decide or are forced to spend within the limits of their actual incomes?