Why the Economic Recovery Sits Squarely on These Shoulders

The key to this economic recovery sits squarely on the shoulders of consumers. Simply, consumers need to spend in order to drive the economic renewal. We did see stronger than expected Durable Goods Orders for August. Excluding autos, Durable Goods increased a nice two percent compared to the estimate of 0.6%. With autos, orders fell 1.3% — better than the decline of 1.4%. The ex-auto reading is encouraging and is exactly what the market needs at this time, but as I have said on numerous occasions, one month does not make a trend.

As long as consumers increase their spending on non-essential goods and services, it will be all good. Yet, I feel that, with the soft condition of the housing market and a lack of job creation, the economy will continue to face hurdles going forward.

For consumers to spend, they need to feel good and confident. Consumer Confidence for September came out at a disappointing 48.5, which was below the estimate of 53 and represented the weakest reading since February 2010. In general, a reading of over 90 indicates a healthy and growing economy, so the number is dismal and clearly points to continued nervousness on the part of consumers.

In housing, the key Case-Shiller 20-city Index grew 3.18% in July, below the 4.21% estimate. The plus is that there continues to be improvement in housing, albeit slower than what we want to see. The amount of foreclosures continues to rise. Currently, about one of 10 homeowners has missed at least one payment on their mortgage. This will continue to pressure the prices of homes and will make homeowners think hard before buying large-ticket, non-essential goods and services. Those trips to the spa and 3-D televisions will have to wait.

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At the last FOMC meeting prior to the November elections, the Federal Reserve left its easy monetary policy intact and said it would do whatever is needed to get things going if the economy stalls. Yet, spending more money will add to the already mounting debt and deficit.

In spite of a sluggish economy, a weak housing market, and about 15 million Americans out of work, the Fed said that the situation was bad, but that it would hold off on doing anything new prior to the November 2 elections. The fact is that there were 27 states reporting higher unemployment rates in August, according to the Labor Department. Clearly, the elections are critical and the Fed is pursuing a wait-and-see approach, but said it would do what is necessary to drive growth.

In my view, the picture ahead is fuzzy — and not as clear as some market pundits on CNBC would tell you.