January 2008

One of the first changes you will notice is the year “2008.” The old year is gone and in some respects, good riddance. We will all make New Year’s resolutions. Our calendars will be changed, and we will address letters with a new date.

The current economic situation will not magically change. The Federal Reserve and the Secretary of Treasury will not be able to say, “We have done all we can and now we need to sit back and allow nature to take its course.” While that is unfortunate, it is a fact of life. I’m afraid the current credit crunch and sub-prime debacle are here for awhile. I recently read we are half way through the pain. Yet others are predicting the economy will not improve until the first quarter of 2009, at the earliest. On Wikipedia, the definition of the word “future” is “the portion of the time line that has yet to occur.” Isn’t that what these folks are trying to do, forecast the future? Who in the heck knows what is going to happen in the future?

What we know is that Wall Street is suffering from a lack of confidence. This lack of confidence has created a credit crunch because financial institutions are unwilling to lend to each other for their liquidity needs. That filters down to the consumer, as these financial institutions are unwilling to increase their loan portfolios.  However, one form of credit that is still being offered to the consumer is in the form of credit cards and non-mortgage loans, which are now at $2.49 trillion.

The consumers’ overall reaction is monitored by the consumer confidence report, which has been down four months in a row. This decline occurred after the index reached a seven year high in July of 2007. As each new bit of economic news becomes available, such as a forecast of a pending recession or that housing foreclosures rose sixty-eight percent in November, the consumer pulls in even further.

On the other side of the equation, inflation appears to be increasing. The most recent producer price index and the consumer price index both recorded larger increases than expected. Oil continues to remain elevated. This not only affects the price at the pump, but also fuel oil for heating homes this winter. And don’t forget, the cold months aren’t  yet here. These things add to the fear and uncertainty of the consumer, and will affect his or her confidence.

Unfortunately, the discussion we had in last month’s FYI concerning “stagflation” is now beginning to be talked about more often, and mentioned by several well-respected sources, including former Chairman Greenspan.

But wait a minute, all is not gloom and doom! Nobody said 2008 was going to be easy. We can actually look at the possibility of a recession, or whatever might happen, and accept it for what it is, an overdue correction brought on by the extravagant economy we have just experienced. Recessions are nothing more than a cooling off period and usually last approximately ten months. We have certainly lived through them before. When handled properly, they take the excess off of an overheated economy and allow us to get back to a more normal way of doing business.

If we have managed our credit unions as always, with a mantra of safety, liquidity and yield, 2008 does not have to end any differently than any other year. 

Once again, I wish you all a very happy and prosperous New Year and remember, Mid-Atlantic Corporate is your friend in the business. We are here to help in any way we can.