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And It Will Continue To Slow
-- September 11, 2002

The Fed's beige book confirms what we've been telling you: The economic recovery has not gotten underway. In fact, the economy is weakening even more. There are only pockets of strength, namely in the housing and auto sales sectors. And these, too, may be starting to cool.

First, the auto industry has been forced to extend its zero-percent financing deals into the 2003 season. Initially, these incentives were just being used as a stop-gap measure to pump up spending after the September 11 attacks last year. Now, they have become a permanent fixture.

But that's not exactly good business for the auto industry. Car manufacturers with their own credit departments, like Ford and GM (Ford Motor Credit and GMAC Financing), have already lost income from financing plans in this deal.

Now, there is a glut of used cars on dealers' lots. That means dealers will need to lower the price of used cars to unload their inventory. And as used-car pricing becomes more competitive, car manufacturers will be forced to lower the price of new cars. It becomes a devastating spiral of deflation. And when this happens, you can expect to see profits plunge.

Second, the housing boom is a bubble waiting to burst. Housing prices have climbed too much, too quickly. They are not sustainable, especially as the economy continues to slump.

The beige book points out that despite a strong housing market, commercial real estate and business lending was weak in late July and August. That's because businesses aren't expanding They're not looking for new space or new cash. And they're not looking for new employees -- which means that the job situation is likely to deteriorate even further in the months ahead.

If more jobs are cut and fewer new jobs are created, fewer Americans will be in the market for homes. And others may be looking to sell.

related article: Economic Growth Slowed Recently -- Fed