Federal Reserve Challenge

Personal Income increased by $47.4 billion or.4% Disposable Income increased by $40.6 billion or.4% Personal Consumption Expenditures increased by $52.8 billion or.4% Consumer spending decreased during September due to worries over the housing market and credit problems. The Commerce Department said consumer spending was lower than the projected.4%; however, the.4% increase in income matched analysts’ predictions.

Consumer confidence has been dropping since August. The Consumer Confidence Index is 95.6, compared to 99.5 in September. The Present Situation Index is down from during September.

Manufacturing ISM Report Economic activity in the manufacturing sector expanded in October for the ninth consecutive month. Economic activity in manufacturing sector is expanding at slower rate compare to last month.

Nondefense Capital Goods Shipments

Industrial Production

Capacity Utilization

Subprime The market for subprime mortgages and related instruments will have to absorb further defaults in coming months.

New Housing Construction Data Both building permits and housing starts will be shown as a percentage change from the prior month and year-over-year period. In addition, both data sets are divided geographically into four regions. The residential construction industry does not seem to be recovering after the housing slump.

Existing Home Sales Report Single-family starts were down notably in the Midwest region. There was a gain in the Northeast region. The South and West regions were largely unchanged. A recent study shows that 33% of home buyers walked away from their deal prior to closing this year. (Last year, only 4% of home buyers walked away from their deal prior to closing)

Nonresidential Construction Nonresidential construction is growing at steady pace.

Companies Affected by Housing Slump Countrywide lost $1.2 billion in the third quarter; first quarterly loss in 25 years. Merrill Lynch wrote-off $7.9 billion in losses; mainly due to its mortgage activities during the third quarter. The losses were much larger than the $4.5 billion loss estimated. Merrill Lynch’s net loss from continuing operations was $2.24 billion. Around this time last year they made a net profit of $2.14 billion. The housing slump is also affecting cable providers such as Comcast. They reported a 54% decline in profits and their stock plunged 11%. Since fewer homes are being occupied, they aren’t receiving new subscribers. D.R. Horton reported its fiscal fourth-quarter orders fell by 39% and the value of those orders plummeted by 48% Pulte Homes and Ryland Homes both reported losses. Centex, a rival company to both, not only cut prices on homes by 15-20% but also cut its staff by 40%. Citibank recorded a 57% profit loss because of default mortgages and tight credit markets. Analysts predict a $10 billion writedown from Citi during the fourth quarter.

California Since many families have been displaced by the fire, they will be forced to enter into the housing market to purchase a new home, or find a place to rent. This consequently leads to a competitive rental market. With more than 19,000 condominiums and single family houses vacant, this will attract potential buyers. With the decline in new jobs – mainly due to the slowdown in construction – construction will have to pick up, which will lead to new jobs and n increase in “spending power.”

Compensation costs for civilian workers increased 3.3 percent for the year ended September 2007, the same as for the year ended September 2006.

U.S. Dollar Index The dollar has weakened against 13 out of the 16 most actively traded currencies. The dollar is predicted to decline even more due to speculation of slower employment growth and pressure on the Federal reserve to cut interest rates. Despite 166,000 new jobs added to the economy last month, the dollar continues to plummet because of bank concerns related to subprime mortgages.

U.S. Dollar vs. Other Currencies

Oil Crude oil futures spiked to $96 a barrel on Friday because of sanctions placed on Iran by the UN. Light crude oil also increase by $95.93, and hitting a high of $ On Thursday, oil prices slightly declined due to dismal reports on consumer spending and industrial activity. The AAA,, Automobile Club, and Oil Price Information Service said gas prices rose by 2.9 cents at the pump; the national average for a gallon is now $2.94. According to analysts, gas prices are catching up with oil prices. Gas has increased by 39% since August. December gasoline increased by $9.63, $2.43 a gallon. December heating oil rose by 6.14 cents, $2.57 a gallon. Due to investors’ concerns over the tension between Turkey and Iraq, gas prices have sharply risen. In addition to that, Hurricane Noel has disrupted oil shipments, and OPEC hasn’t been able to produce all of its increases due to maintenance on some oil fields. September marked the first time a barrel of oil spiked above $80. Some analysts predict oil prices will hit $120 a barrel; however, most analysts believe supply and demand will never allow oil prices to increase at such a rapid level. The EIA predicts heating oil will also increase by 22% this winter. This will lead consumers to cut back on goods and services, which will consequently have a negative effect on economic growth. Many analysts believe the cost of crude oil will drop as soon as OPEC increases it’s production and curbs fuel consumption at the gas pump. OPEC has announced it will increase its production in November by 500,000 million barrels. Three weeks ago, oil prices declined due to fears that the U.S. economy would enter a recession, and also because of an increase in oil production. However, due to geopolitical issues, such as the tension between Turkey and Iraq, oil prices begun to increase.

Oil Oil prices won’t just affect motorists but also the airline industries. The Air Transport Association said: “Every penny paid for a gallon of jet fuel costs the U.S. passenger and cargo airline industry $190 [million] to $200 million annually.” American Airlines has raised roundtrip prices by $10 due to an increase in oil prices. Some economists say the cost of energy will not lead the U.S. economy into a recession because the country is more fuel efficient and personal income has increased. Due to this, individuals can now accommodate higher energy costs. With the prices of oil gradually increasing, it’s only a matter of time before it begins to hurt the economy.

Forecasts Labor market remains tight. Unemployment rate will remain steady or rise in the near term. Consumer spending expected to decline as indicated by consumer confidence caused by a drag in housing wealth. Businesses remain fairly strong despite a recent drop in the ISM Index. Housing continues to decline and is not expected to recover till Inflation holds steady but there are still major upside risks with the fall of the dollar and rising prices of oil and commodities