Just how strong is the economy?

by: Henry Meier

With apologies to those of you who hate sports analogies, some recent research produced by the Federal Reserve Banks of New York and Chicago demonstrates that we are living in a wedge shot economy:  it looks great from about 150 yards out but as you get closer things aren’t quite as good as they seem.  Suffice it to say that Fed officials have a tough decision to make about when to raise short term interest rates.  If the economy is gaining strength, the time to start raising rates is now or the economy could overheat.  Conversely, imposing interest rates on a feeble economy is the financial equivalent of bloodletting.

Just how sluggish is the economy?  The first bit of analysis comes from the Federal Reserve Bank of New York’s Liberty Street Blog, which, by the way, is a site well worth bookmarking for anyone interested in following economic trends in a digestible format.  It analyzed the most recent Quarterly Report on Household Debt and Credit and its findings go a long way toward explaining why the housing industry has lagged as a stimulus to economic growth even as the worst of the Great Recession fades in the rearview mirror.

Credit card spending is rising for people across the credit score spectrum but even the most credit worthy borrowers are holding back on housing debt.  New mortgage originations are 70% lower than they were in 2013.  In addition, since 2008, the “lions share” of new mortgages have gone to persons with credit scores of at least 720.”  This presumably older and cash heavy demographic isn’t snapping up McMansions at bargain prices either.  Instead “[t]he upsurge in originations by creditworthy borrowers in 2012 and 2013 consisted mostly of refinances and added relatively little to outstanding balances, thanks to record low mortgage rates.”  In other words, the people with the best credit and most money to spend are cutting back on home buying just when the economy needs it most.  Truly patriotic Americans would be taking on debt for the good of the nation.  Just joking.

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