Light at the End of the Tunnel or an Oncoming Freight Train?

With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe.

With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe.

For the first quarter as a whole, we now expect a contraction in consumer spending much less severe than last year’s fourth-quarter contraction of 4.3%. Although we do not expect to see outright growth in real consumer spending until the fourth quarter of this year, we believe the deepest quarterly contraction is behind us.

With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases and production of cars and trucks will be stepped up. In fact, production increased by almost 24% in February, admittedly from an extremely depressed January seasonally-adjusted annualized base of only 4.6 million units.

When the Fed’s Term Asset-backed securities Liquidity Facility (TALF) kicks into a higher gear, more credit will start flowing again to households for the purchase of motor vehicles. And, of course, we households still need to buy staples, not to mention toothpaste and food. As an aside, the TALF program is now authorized to provide up to $1 trillion of financing for the purchase of newly-issued asset-backed securities. This amount is approximately one-third of the net credit created by the private financial system in 2007; one-half the net credit created in 2008. So, the TALF program is considerably more than chump change.

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