My guy Mike "Hate the economy, love the stock market" Darda, chief economist at MKM Partners, gives yet another sobering analysis (boldface mine) of the state of the world's largest and most productive economy:
1) Despite a multipronged monetary and fiscal effort to stop the hemorrhaging in housing and break the crisis of confidence in credit, the situation remains shaky.
2) Credit markets have not participated in the recent rally the financials have enjoyed—a red flag in our view. Mortgage spreads, swap spreads and lending standards are two standard deviations or more above historical norms. This will serve as a stiff headwind until or unless it reverses.
3) The rebound in housing affordability seen earlier in the year is now running headfirst into rising mortgage rates and tightening lending standards. If the carnage that Fannie and Freddie have suffered further reduces liquidity in the housing market, recovery will be delayed further. Corporate borrowing costs are also rising.
4) Typically economic inflection points occur after spreads begin to narrow, lending standards stop tightening, and corporate borrowing costs ease. On this score, jobless claims appear to be working their way higher while the Fed's Beige Book for July, one of the first reads on Q3, showed that "economic activity slowed somewhat since the last report" with consumer spending "mixed, weak or slowing." Loan growth was reported to be restrained across the country with most districts reporting "a further tightening of credit standards, especially for residential real estate and construction loans." Against this credit market foliage, we expect the second half of 2008 to be decidedly weak.