As my husband reaches for the last cookie in our coveted box of Thin Mints, I tell him: “Hey, did you hear that the sales of Girl Scout cookies has gone down for the first time in decades? More evidence of the impending recession.”
“No way. There’s no recession and the only reason for a drop in sales of Girl Scout cookies is that there are not enough cookies in the box to justify the price!” he answers resolutely, as he throws the box into the overflowing garbage.
It sure feels like a recession to me, and most economists I think would tend to agree with me -- not my husband! When GDP (gross domestic product) slows, unemployment increases, housing prices decline, and businesses stop expanding, it’s the start of a recession.
Consumer spending (which is 75 percent of the GDP) is slowing in most categories, but especially in those related to the home, such as furniture, electronics, and even Girl Scout cookies! The drop in consumer spending can be attributed mostly to consumers feeling the pressure of increasing prices in food and energy costs, a weakening job market, and a decline in home and other asset values, such as our investment portfolios. How can we justify spending extra when we see the value of our homes and other portfolios shrink by 10 to 20 percent?
The current economic slowdown can be attributed in part to the Subprime Mortgage Crisis and the housing market decline. Home values have fallen approximately 10 percent and could fall another 5 to 10 percent. This affects your home equity. When home equity falls, it affects your wealth -- my husband argues that this is true only if you sell your house at this time but, for me, even if we don’t sell our house I feel less wealthy and less inclined to spend on discretionary items.
Falling home prices and increasing foreclosures create a vicious cycle: The more prices fall, the less likely it is that borrowers can use home equity to refinance into a new more affordable loan, which leads to more defaults. Then, as foreclosure rise, housing inventory increases and further depresses prices.
In an attempt to revive the economy and ease the credit crunch, the Federal Reserve has lowered interest rates. In normal times, this would have helped with refinancing our home or getting a better mortgage. But right now, lenders have become reluctant to lend out of fear -- which has been leading to more rate cuts. The risk of these continued rate cuts, however, is inflation, which means higher prices are passed onto the consumer.
Next time my husband grabs for the Girl Scout cookies, I’m going to steal the box from his hand -- not just because of the calories, but because in this economic climate. We’ve got to make those things last!