Consumers Can't Carry the Load Anymore

McTeer, who expressed what the financial markets and many of its participants have been saying for some time, was one of two governors who voted for an ease at last week's Federal Open Market Committee meeting.

That's All Right, That's OK

"Repeated shocks to the U.S. economy are delaying the onset of a full-fledged recovery," Bruce Steinberg, chief economist at Merrill Lynch wrote this morning. "Sharp stock market declines and the threat of war are increasing uncertainty, depressing confidence, widening credit spreads and raising oil prices."

Steinberg, who didn't mention the shutdown of West Coast ports due to a labor dispute, lowered his GDP growth estimate for the fourth quarter and first quarter of 2003 to 2.5%. The economist, who now expects the fed funds rate to be at 1.25% at year-end, also lowered his S&P 500 earnings forecast to $45 from $46 for 2002 and to $52 from $55 for 2003.

Nevertheless, Steinberg remains convinced the risks to the economy are event-driven, rather than structural. "There are no deep-seated flaws in the U.S. economy," he wrote, arguing that corporate and household debt servicing is falling and that "any tech bubble is long resolved."

The U.S. is "not turning into a Japan or a Germany, perennially plagued by slow growth because of structural rigidities and bad policy," he continued. The "reality is that interest rates are extremely low, inflation is nonexistent and productivity growth is stupendous. Strong U.S. growth will be the eventual result."

Far be it from me to quibble with as esteemed an economic observer as Mr. Steinberg, but let's take these one at a time:

Corporate and household debt: According to the Fed, the household debt-service burden -- the ratio of debt payments to disposable personal income -- was 14.04% in the second quarter, down from 14.39% in the fourth quarter of 2001, but more than a percent above the average of the mid-to-late 1990s. Falling equity prices and some stabilization -- if not actual decline -- in home prices suggest that level is likely to rise for the third quarter. Corporate debt might be falling, but that's largely because many organizations are no longer able to access the corporate bond market and the default rate is double the long-term average of 1.6%, according to The Wall Street Journal.