Economy Watch: The Latest Monster From the Closet: The Euro-Contagion

If one or more major euro-zone economies default, the U.S. is sure to take a hit, Fitch said. Homebuilder confidence rose slightly in November. And the CPI dropped in October, mostly due to energy prices.

November 17, 2011
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user Images_of_Money

The euro-contagion is on its way, Fitch Ratings said (in effect) on Wednesday. In other words, if one or more major euro-zone economies default on its debt, the U.S. financial industry is sure to take a hit as well. All together, the rating agency said, the largest six American banks have a total of about $50 billion at risk in the nations of Greece, Ireland, Italy, Portugal and Spain, all of which have debt monkeys on their backs to one degree or another. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the company said in a statement.

Meanwhile, Spanish debt has gotten more expensive, with that nation’s 10-year bonds spiking to 6.44 percent on Wednesday. French debt and even Austrian debt — why are we talking about Austrian debt? — has gotten more expensive compared with German debt this week as investors seem to be on the edge of panic, or “contagion” if one prefers an analogy to disease.

Naturally, a little panic (so far a little) goes a long way, depressing equities markets in Europe and then Asia and then North America on Wednesday. The Dow Jones Industrial Average lost 190.57 points or 1.58 percent, mostly in the panicky last hour of trading. The S&P 500 was likewise down suddenly, by 1.66 percent, and the Nasdaq lost 1.73 percent.

Homebuilder Confidence Inches Upward

The National Association of Home Builders said on Wednesday that single-family homebuilder confidence, which has been lower than whale scat in recent years, ticked up a little in November. The NAHB/Wells Fargo Housing Market Index was up three points to 20, building on a three-point gain in October. Confidence, though still not high, is now nevertheless at its highest level since May 2010.

Each of the index’s three components continued to rise. The component gauging current sales conditions rose three points to 20, while the component gauging prospective-buyer traffic rose one point to 15. Both of these components were at their highest levels since May 2010. As for future sales expectations, that rose two points to 25–its highest level since March 2011.

What gives? “This second consecutive gain in the [index] is evidence that well-qualified buyers in select areas are being tempted back into the market by extremely favorable mortgage rates and prices,” asserted NAHB chief economist David Crowe in a statement. “We are anticipating further, gradual gains in the builder confidence gauge heading into 2012 due to these pockets of improving conditions that are slowly spreading.”

Prices Drop Slightly, Wages Rise Slightly

The U.S. Bureau of Labor Statistics said on Wednesday that the Consumer Price Index dropped 0.1 percent in October, pulled down by the usual suspects: oil and other energy prices, which were down 2 percent month-over-month. Food, however, was up by a slight 0.1 percent, the smallest increase all year, mainly as the price fruits and vegetables dropped.

Take out the volatile energy and food sectors, and inflation was up during October, but only by 0.1 percent. Some major categories of goods saw prices drop, such as cars. The annualized core rate of inflation–the one that the Fed uses to determine policy–was 2.1 percent in October, up slightly from 2 percent in September.

As luck would have it for the U.S. consumer, wages were also up slightly in October. The BLS reported on Wednesday that real average hourly earnings for all employees rose 0.3 percent from September to October. That’s a nice uptick, but real average hourly earnings are still down by 1.6 percent year-over-year.