Academic journal article ABA Banking Journal

Keep Watching Those Fundamentals

Academic journal article ABA Banking Journal

Keep Watching Those Fundamentals

Article excerpt

Every so often in this remarkable period for investors, the markets get indigestion. The usual culprits: full employment and the thought that the Fed might have to raise rates sometime before the end of this year. The fundamentals have not changed and once investors begin to consider what is really going on in the economy, markets stabilize. Indeed, we have probably moved towards the central point in rates for the next six months and that is quite good.

Why it is often forgotten is a mystery, but the consumer powers the economy and households are in great shape. Sure, if the second quarter numbers were viewed in isolation, it would look like households had embarked on an era of extreme spending restraint. Yes, there was some pulling back in both borrowing and expenditures during the second quarter. Consumer credit outstandings were flat in June, though there was a strong increase in revolving credit. Demand for loans for mobile homes, boats, education, and vacations was down sharply but these categories are quite volatile and probably rose the next month. Also, while second quarter consumption may have expanded only 0.8%, when that figure is averaged with the 5.3% first quarter increase, consumer spending grew at a 3% annualized rate.

With income and wealth improving solidly, household demand is already picking up. Work stoppage cut auto inventories during the spring and that led to a very weak june for vehicle sales. The added supply in july, however, was scooped up and both auto and light truck sales surged. Total vehicle sales jumped from 14.1 million units annualized in june to 15.5 million units in July, a 9.7% gain. Domestic light truck demand surged 12.2% while car sales increased 8.3%. The three month average of 14.8 million units is solid and indicates the June collapse was an aberration. Going forward, sales should be quite good.

We are also beginning to see indications that shoppers have returned to the malls. Hot weather and clearance sales were the magnets, and chain store sales in July were quite decent. …

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