First the Housing Bust, Then Soft Car Sales; Next, General Consumer Spending Tightens… a Recession Cometh

Starting two years ago, I was writing about how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today.

The auto market, as is typical after a housing bust, is getting hit, too. In July, U.S. auto sales fell to their slowest pace in nine years. The drop in sales was sharp: GM down 22%, Ford down 19%.

Next, we will see consumers start to rein in general merchandise spending as they try to realign their budgets. Yesterday, we got the first glimpse of that, as both Wal-Mart and Home Depot came out and said they expect a soft-to-declining profit year as consumers get tight. The stock market didn’t like news of the inevitable… with the Dow Jones Industrial Average down about 200 points yesterday.

>From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.

The stocks market, my dear friend, has been fueled by unprecedented liquidity over the past few years. And with liquidity disappearing, stocks deflate.

Quite interesting to note, the coming U.S. recession will be homegrown thanks to the housing bust, which ironically started because of too much easy money in their system. Other countries, such as those in Europe; as well as Canada, Australia, Japan, China, and yes, even Mexico, have economies running quite smoothly.