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Ahead of the Curve by Donald Luskin (Author Archive)
Attention, Economic Optimists: Not So Fast
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.
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Jchem: Perhaps we might have saved money by just letting GM (and others) fail back then... But I am just concerned that the psychological/emotional. and even real financial impact of that happening, when we were at the verge of total economic collapse, might just have been too much for our national psyche, and the economy. We'll probably never know Dorian
Dorian -- thanks for the links; I'll need to do a bit of reading. As I mentioned above, I am optimistic; I'm just not sure what measures to use to justify it when there are so many conflicting ones out there. I'm really not sure what would have happened had we let GM go into bankruptcy in the beginning; it wouldn't have been good, that's for sure. On the other side of it though, the Feds could have saved billions of dollars that were otherwise thrown into the black hole. Regardless, I'm an ordinary American as well and keep hoping for better days ahead for us all.
jchem: Thanks for your comments. As I have made it perfectly clear, I hope, I am not an economic expert, just an ordinary American who is optimistic about America and our economy and, thus--rightly or wrongly--seeks signs to confirm such hope and optimism. But you do pose an interesting issue: the rising unemployment and whether unemployment is a lagging or leading indicator of the economy. I have to be frank, I don't know. But economists fall on both sides. Most claim that "unemployment is the most popular lagging indicator, because it shows whether companies anticipate things getting better or worse. If companies believe things are bad and getting worse, unemployment will rise. If they are more optimistic, then unemployment will fall" There are others who feel that this "ain't necessarily so." For example, in "Employment a Lagging Indicator? Not Always. Using Outdated Economic Data and Trends for Future Financial Models. Just Because Stocks Rebound doesn't Mean the Fundament...(Read more of this comment)
Dorian -- All I was saying is that sure, there are some glimmers out there and reasons to be a bit more optimistic than say, 3 or 4 months ago. I never fully understood the inner workings of the stock market or how it can be an indicator of anything; perhaps that's just my lack of knowledge. I've always felt that the number one barometer to the economy is unemployment. If people don't have jobs, the last thing they probably care about are the numbers of the stock exchange, polling data, or what anybody else has to say concerning the economy. Just as "all politics is local", I get the sense the same may be true with regards to personal finance. If I don't have a job, nothing else matters. Fortunately, I do, but I cannot say the same for all the folks who just saw their livelihood crushed into bankruptcy.
You 're welcome.
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