In its last meeting with Alan Greenspan in the chairman's seat, the Federal Reserve hit a new milestone as it raised short-term interest rates for the 14th time, but hinted that the end of rate increases is in sight.
The Fed said that though uneven, "the expansion in economic activity appears solid," noting that core inflation, which excludes food and energy, remains "relatively low" but expressed concern about rising energy prices and their possible effect on inflation.
So is the economy in good shape or not?
It's tough enough to get a handle on the country's economic picture under normal circumstances. Searching through reams of reports from the Federal reserve, combing the stock market trades for news, and reading every business newspaper on the racks can lead to volumes of arcane, and often contradictory, reports, leaving any interested observer more confused than when they started.
For example, The Department of Commerce released a report on Jan. 30 stating that consumer spending increased by 0.9 percent in December, reflecting a willingness by consumers to "tap assets" in order to continue purchasing goods, despite higher prices.
Simultaneously, the personal savings rate has dropped to below negative levels, the lowest it's been since the worst years of the Great Depression.
Overall economic growth slowed to 1.1 percent for the last months of Dec. 2005, the lowest rate in three years.
The Wealth Effect
And yet, economists and pundits are claiming that Americans are feeling free to spend more, banking chiefly on the appreciation of their houses in a blazing-hot market. The usage of "unrealized gains" in home equity produced what National Association of Realtors' (NAR) chief economist David Lereah called the "wealth effect."
The "wealth effect" enabled homeowners to tap their equity in order to pay off debts and buy new luxury items, or just to handle major expenses such as medical care, child care, and so on.
The problem is that the Consumer Price Index (CPI), the chief measure used by the Commerce Dept. to measure spending growth and reduction, doesn't account for costs for food and energy, which are considered "too volatile" to track.
This means that the current strife in Iran and Nigeria, which is pushing gas prices towards $3 a gallon, isn't being factored in to analyses of consumer spending.
And the usage of homes as ATM's is coming to an end. Housing markets are showing steep declines, particularly in expensive areas such as California's Bay Area, the greater New York area, and the Washington, D.C. metro region.
Massachusetts, another expensive state for housing, is seeing a 12-year-high on property foreclosures, due to the inability of many homeowners to meet their payments and the "flattening" of home appreciation rates.
Even the credit industry is conflicted about where the economy is going next.
A poll conducted by the Experian credit bureau and the Gallup research center claimed that "two in three" consumers planned to make credit card debt reduction a priority in 2006. The poll claimed that 77 percent of the respondents were "comfortable with their level of debt."
Subprime Lending "Booming"
Meanwhile, according to rival credit agency Trans Union, the market for subprime credit lending is booming.
An analysis conducted by the agency's "Market Intelligence" division claimed that "subprime borrowers" opened 16 percent more accounts between 2004 and 2005 than the previous year, while "prime risk" borrowers declined in their rate of new account openings by 5 percent.
The "subprime" or "fringe" economy, consisting of predatory and payday lenders, "creative" mortgage brokers, and so on, may be the real grease that's keeping the economic wheel turning. The subprime market generated gross revenue of $78 billion in 2001.
Payday lenders made $25 billion worth of loans in 2003, and thed disparities in lending are deliberately targeted to hit the working poor and minorities the hardest.
The "wealth effect" is just that -- an illusion, not much different from the special effects we've come to expect in fantasies that flash across the silver screen and the heavily-mortgaged plasma screens in our family rooms.
The real story may come from the ever-increasing number of households who are relying on shady lenders, credit cards, and over-mortgaged home equity just to make ends meet.
Until the economic pundits stop trying to spin the news and lay the facts out straight, the end result may be a lot of mixed messages and confused -- even misguided -- consumers.