IN THE DEPTHS OF THE Great Depression, Franklin Delano Roosevelt inspired confidence when he said, "The only thing we have to fear is fear itself." Today, our economy is definitely showing signs of coming out of a near-depression. Ironically, all our recovery has to fear is the recovery itself.
What I mean is that there is the risk that recovery will get in its own way -- that it could stall itself out before it really gets going.
We really are looking at the beginning of economic recovery here. The banking crisis is definitely over with the Treasury and its "stress tests" having finally blundered into a formula that has helped troubled banks get back on their feet. New jobless claims, historically an excellent coincident indicator of the end of recessions, appear to have peaked. New orders for capital goods have turned positive for the first time since before last summer's financial crisis, and that's an excellent leading indicator of an investment revival.
But here's the problem. Take oil, for example.
It was a great assist to recovery to have the price of oil collapse to nearly $30 per barrel this winter. That happened because of a collapse in global demand as the world economy fell into deep recession. At the same time, it was good news in that it led to a fall in gasoline prices, which did a lot to enable consumers to go back to the shopping malls and start spending again after a dismal Christmas retail season.
But as the world economy has begun to recover and demand for energy has started to build, the price of oil has doubled. Gasoline price has risen, too. Last December, the average retail price in the U.S. for regular gasoline was about $1.65, according to the Department of Energy. Today it's about $2.45 -- almost a 50% increase.
It's great that the world economy wants to buy energy products again. But it's a lot easier for U.S. consumers to flock back to the malls with gasoline at $1.65 than at $2.45. If it was that low price that made recovery possible, will the new higher price kill it? It's a possibility.
There are a number of similar examples all with the same flavor of good and bad news.
Just think about those shopping malls. At the same time as consumers were left with extra spending money thanks to cheap gasoline, that money went further at the malls thanks to extraordinary price-cutting by merchants. Remember what it was like over the holidays and in January? It was typical to find discounts of as much as 75% on just about everything.
But have you been to a mall lately? Those discounts are simply gone. Yes, I understand that they were necessary at the time to move inventory off the racks and get anybody to buy anything at all. But now that the discounts are gone, stuff in the stores suddenly seems quite expensive -- even though it's just normal.
The same goes for housing. The drop in housing prices across the nation over the last two years has been a catastrophe for homeowners, but it's been a benefit to first-time buyers. Where prices have fallen the most, buying activity has been the greatest.
Take a look at the chart below showing the latest data on sales of existing single-family homes. In the western U.S., where prices have fallen the most, sales volume is soaring. But in other regions, where prices have fallen only modestly, sales are off. It's just like at the malls -- cut the price and the buyers will show up and buy.
But now what? What happens if home prices stabilize here? That would be a wonderful thing to be sure. But there will be a lot fewer buyers when the bargains aren't so obvious, because there are still a huge number of homes that need to be sold.
The worst example of recovery being a risk to recovery is interest rates. As I wrote last week, Treasury bond prices have been falling sharply the last several weeks as investors no longer insist on the absolute safety of government securities. That's a good thing, because it means the investors are willing to take risk again for the first time since the financial crisis last summer. But, at the same time, it's a bad thing because the economic recovery has been greatly assisted by low interest rates. And when bond prices fall, interest rates -- by definition -- go up.
It's an especially bad problem because mortgage interest rates are closely tied to Treasury yields. It's been a blessing to the troubled housing market to have mortgages available at interest rates below 5%. But how long can that last if Treasury yields keep rising?
Same for the interest rates on variable-rate mortgages. Many of them are tied to Treasury yields, and if those yields keep rising, then the monthly payments homeowners will have to make will rise, too. That's as bad for consumer spending as higher gasoline prices. It soaks up money that could be spent on other things.
Normally I'd just wave away all these issues. I'd recognize that the economy is always in equilibrium and say it's perfectly fine and natural for these impediments to recovery to crop up, ironically, as the result of recovery itself. What worries me this time is that the economic shock we experienced last year was so profound and our recovery is so new and so fragile, I'm just not sure we're ready for any impediments at all.
In other words, I'm worried that the economy is going to find its equilibrium at a very low level of activity and growth. Or to put it another way, I'm worried that our recovery is going to be a very weak one.
It doesn't seem to me that the stock market especially disagrees with me. From the March lows, we got as much as a 37% rally, but now that's stalled out. And even in the midst of the Great Depression, we had better than that (we had a more than 50% rally in 1930 after the Great Crash).
So be thankful for such a recovery as we have. It's a good thing. But don't count on the good times rolling anytime soon.