Slowdown in the U.S. Officially Underway

I’ve been predicting the carnage in the U.S. housing market would eventually result in consumer spending tightening, putting pressure on consumer stocks. And that’s exactly what’s starting to happen with the big U.S. retailers.

Home Depot and Sears, two giant American realtors, have both come out over the past couple of days reducing their 2007 earnings projections. Home Depot is expecting earnings to fall 15% this year, as the company cited the poor housing market for a drop in product demand. As for Sears, it is estimated the company’s earnings dropped at least 20% in 2007.

Home Depot and Sears are only two casualties… I expect to see plenty more U.S. consumer stocks start to hurt because of the weak housing market. Yesterday, the Dow Jones U.S. Home Construction Index broke down to a new four-year low — an event I interpret as extremely negative for the U.S. housing market.

As housing prices continue to fall in the U.S. and rates for mortgages continue to rise, consumers simply have less money to spend on secondary items. Why renovate your house if it is falling in value? Why buy new or more furniture for your home when that money could go to paying higher monthly mortgage costs (especially for ARM-holders who are seeing their loan costs reset much higher).

The slowdown in the U.S. is officially underway, courtesy of the hard landing in the American housing market. Expect more consumer stocks to come under pressure. And don’t rule out that possible recession most economists have forgotten. The U.S. could be in a full-blown recession by the end of 2007 or early 2008.

NEWSFLASH — Canadian interest rates rose yesterday one- quarter point to a six-year high with the Bank of Canada, stating more increases could be ahead. The United States is now officially the only country in the G7 that has yet to raise interest rates in 2007.