The latest report on the state of the economy was better than expected. The first quarter grew by an anemic 0.6 percent. That's both good and bad news for housing.

The growth, says the Commerce Department, was largely due to inventory building. Sales of domestic product fell 0.2 percent, and domestic sales were worse at 0.4 percent. These figures recall declines from the recession of 1991, and suggest that next quarter could be even softer.

That had all eyes on the Federal Open Market Committee meeting yesterday and its announced quarter point rate cut. Short-term rates are the rates at which banks can borrow overnight money from each other or from the Fed itself. They generally result in lower borrowing rates for consumers. Most economy watchers agreed that the Fed is coming to the end of its rate-cutting cycle, so the quarter point cut was expected.

One reason rate cuts are slowing to a stop is the rise in inflation, driven largely by fuel prices which impact shipping. Higher costs are passed on to the consumer.

Squeezed by doubling gas and grocery prices since 2002, consumers are cutting back on non-essentials which largely drive the American economy. That's right -- we're a luxury-loving society. Just read the financial advice from most advisors and the first thing they tell you is to give up your daily Starbucks. That tells you how embarrassingly rich this country really is. Giving up $3 coffee isn't pain.

We are spoiled rotten as a nation, and these near-record low short-term rates are doing nothing to encourage financial responsibility in the consumer. Why should we save money when consumer credit is so cheap?

That tells us two things -- we have a long way to go before the economy feels real pain and it will be ridiculously easy to get consumers to reload their credit debt.

Buoyed by their tax refund and economic stimulus checks, consumers will want to experience the "wealth effect" again before they blow the money on more non-essential goods. After that, it may take some time for the economy to recover because the Fed will be out of options, government stimulus packages will be finished, and consumers will be left facing even more debt than they have now.

After all, withdrawing from any addiction is difficult, particularly non-essential spending.

Published: May 1, 2008

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