The condition of the U.S. economy continues to be a major concern for investors and corporations. There has been evidence that the economy is slowing down, which is a potential precursor to a recession this year. The current data suggest that we could see a U.S. recession this quarter. Consumer spending in December increased a mere 0.2%, down from the 1.1% gain in November, and the weakest showing in 15 months, according to a report released by the Commerce Department.
The importance of the weak showing in consumer spending is that it accounts for about two-thirds of the growth in gross domestic product. In December, the GDP growth was a miniscule 0.6% on an annualized basis, which supports the possibility of a recession in the first quarter of 2008 if things do not improve.
Of course, the Federal Reserve aggressively cutting the Fed Funds rate and pumping tens of billions of dollars into the fragile credit markets is a sign that 2008 could be in for a rougher ride than expected. The Fed has cut the key lending rate by 125 basis points over the past two weeks, thereby raising concerns that the U.S. economy may be far worse off than we believe.
On the federal side, the White House and U.S. legislators are also trying to push through a massive $150-billion stimulus plan to jumpstart the economy and help avert a recession.
As we move forward, we expect to hear of more impacts driven by the fragile state of the sub-prime market and increased credit concerns in the banking system, which ultimately would hurt consumer spending and economic growth.
At this point, I continue to be cautious about the market and believe that the risk remains high given the situation. I advise you to remain prudent and not rush to buy stocks on market dips, as there is no evidence a bottom has been reached.