Siento wrote in his article on the hard sell of the Third Way that a recession is inevitable and this is the point where an incumbent government is most vulnerable. The American consumer has been shopping without dropping, keeping the world economy, and particularly the Asian economies humming. However, the impact of Hurricane Katrina has also seen a drop in the Consumer Sentiment Index.

The Big Picture is one of the must read blogs that I hit each day. In a recent post, titled; Chart of the Week: U Michigan Sentiment Index Gives Market Warning , the interaction between a big drop in consumer sentiment and the stock market was explored. From the article;

Some Traders find a correlation between consumer sentiment and Dow Industrials' price movements. Robert McHugh states that "often, the sentiment index and equity prices move contemporaneously, so we do not benefit from foresight. On occasion, we do get an early warning as the sentiment index leads prices." We will see if this recent drop presages another.

Americans first shopped till they were near exhaustion from the appreciation in their stocks, and when the boom ran out of steam, they then started spending the new found equity in their homes.

Hurricane Katrina caused a massive shock with the sudden rise of oil prices. Americans had started seeing the price of petrol rise anyway, but 50c rises in a day is enough to make any consumer shy. Petrol prices have since dropped down to pre-hurricane levels, but I would not be surprised if Americans are still sensitive to just how vulnerable they are to any sudden inflation of energy prices.

Americans have defied experts in the past over their propensity to keep consuming, and have helped keep the world economy chugging along. Until house prices level off, I don't see this consumer binge stopping - however, I will be reading The Big Picture for more updates on any correlation between the consumer sentiment index and the stock market. Like Siento, I see a recession as inevitable, though I reckon it will be when we see the end of cheap money as interest rates rise [IANAE].

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