Or that could be the reaction to a weaker than expected consumer confidence reading and a very negative (while less negative) reading of the S&P/Case-Shiller index of home prices in 20 U.S. cities. The drop of 18.1 percent in the home index for April followed an 18.7 percent drop in March, but was marginally better than the grim expectations of an 18.6 percent drop. The decline in the consumer confidence index surprised experts who had predicted an increase from May’s reading of 54.9. The index dropped to 49.3 (any reading below 50 signifies a negative outlook). These numbers provide more evidence that the economy still has a long way to go to recovery, and that the market has likely been too optimistic.             

 

In addition to the housing market that just refuses to stabilize, the decline in a confidence index reflects a dismal job market. The result of rising unemployment and declining home values is rising default rates – even in what was considered higher-quality loans.  Delinquency rates on the least-risky mortgages more than doubled in the first quarter on a year-over-year basis. And while Americans are now more frugal, with the personal savings rate rising to almost 7 percent in May, the highest rate since 1993, it’s a negative for the economy. Without a sustained rise in consumer spending, which accounts for roughly 70 percent of GDP, the economic recovery will be slow and difficult.

 

No wonder the Federal Reserve held interest rates at virtually zero at its regularly scheduled meeting last week. The policymakers also decided to continue with the $1.75 billion government securities purchase plan. Those results were expected. It’s the Fed’s reading on inflation that warrants further review. The Fed made it a point to state that inflation was not a threat at this time due to “substantial resource slack” despite recent strength of energy and commodity prices. However, that energy and commodity prices have made strong advances in the last six months without any real growth—other than in China and India—shows that inflation could come on rampantly without warning.