Demanding Answers To The Demand Problem

The problem with our economy is demand:  not enough of it, too much supply.  Basic Econ 101 says when supply outstrips demand, prices must come down.  When that happens on a macroeconomic scale involving an entire economy, that's deflation.  Two economic reports out today confirm this problem is continuing, first, retail sales in June were down another half a percentage point.

Retail sales fell in June for the second straight month, more evidence that the recovery will slow in the second half of the year.

Retail spending dropped 0.5 percent in June, the Commerce Department reported Wednesday. That followed a 1.1 percent fall in May. Excluding autos, spending was down 0.1 percent in June.

Much of the weakness last month came from a drop in auto sales and a decline in gasoline prices. Excluding autos and gasoline, sales would have risen 0.1 percent in June after having plunged 1 percent in May.

Americans are spending less and that could threaten the pace of the recovery. Consumer spending accounts for 70 percent of economic activity. But consumers have held back because of high unemployment and other signs that have dampened their confidence, such as the volatile stock market and a struggling housing market.

And that's bad enough.  People are buying less stuff, paying off debt, and putting off purchasing.  Since we have a consumer-driven economy, no demand, no economy.  The other worse story, demand for mortgage applications has now sunk to a 13-year low.

Demand for loans to purchase U.S. homes sunk to a 13-year low last week, and refinancing demand also slid despite near record-low mortgage rates, the Mortgage Bankers Association said on Wednesday.

Requests for loans to buy homes dropped 3.1 percent in the week ended July 9, after adjusting for the Independence Day holiday, to the lowest level since December 1996, the industry group said.

Refinancing applications fell 2.9 percent, and the mortgage market index that reflects total loan demand also fell 2.9 percent.

Average 30-year mortgage rates edged up 0.01 percentage point to 4.69 percent, but were near the record low of 4.61 percent set in March 2009, based on MBA records dating back to 1990.

Despite record-low mortgage rates, people still can't afford to refinance or purchase a new home because banks still refuse to loan out money in this economy.  The housing market will continue to fall, the deflationary spiral will continue, and Washington doesn't have the political will to do anything about it.

2010 will continue to be bad.  2011 will be significantly worse.