There are more signs that the wheels may be about to fall off the economy and the Federal Reserve seems a bit nervous about how to best insure that doesn’t happen. The prevailing question at the moment centers on whether to continue the long string of rate hikes in order to keep inflation in check or to ease off in order to keep the economy rolling forward. Regardless, it now appears that consumer confidence has reached a level where spending is being voluntarily restrained in anticipation of leaner economic times. Bloomberg has two articles discussing the economy here and here.

Aug. 29 (Bloomberg) — U.S. consumer confidence fell to a nine-month low in August as higher gasoline prices raised fears of inflation and a slowing housing market rattled Americans, a private survey showed.

Americans are restraining their spending, which makes up 70 percent of the economy, as gasoline prices are kept aloft by violence in the Middle East and a slowdown in the housing market makes them feel less affluent.

“The housing slowdown is an increasing drag” on growth, said Zoltan Pozsar, an economist at Moody’s in West Chester, Pennsylvania. “That consumer and business confidence hold up as housing slows is crucial for the expansion.”

Frankly, one needn’t be an economist to realize that if the housing market continues to slow, consumer confidence is going to weaken. Further, there are indications in a number of regions that housing prices may actually be dropping…a situation that will not only slow consumer confidence; it may well lead to a surge in foreclosures and bankruptcies and set into motion a scandal similar to the Savings & Loan debacle witnessed during the late 1980’s.

“When you have a very visible strain in the economy like housing at present, something that probably won’t break but just might, the Fed gives more weight to the potential for exponential losses,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “A policy shock would be more costly than usual at present.”

Minutes released today of the Federal Open Market Committee’s Aug. 8 meeting, where interest rates were kept steady for the first time in two years, will likely show how worried policy makers are about a property downturn versus the dangers of accelerating inflation.

Unfortunately, it may be a case of over optimism to presume that the Federal Reserve’s monetary policy can fully manage the factors that drive the U.S. economy…a belief that gained credence during the Greenspan years…a period of relative stability. Economic problems can easily spiral out of control as it is virtually impossible to isolate the influence of one economic segment from the remaining segments. Further, housing may well be the single most influential segment…one capable of triggering exponential ramifications.

To read the full article at Thought Theater, link here:

Business The Economy: The Makings Of A Perfect Storm?