10/ 01/ 2008
by Bill Dunkelberg
Although the economy has refused to succumb to the "recession" that many economic forecasters and the Fed warned about since last September, it has been able to muster little momentum, and there are still strong headwinds threatening its progress.
Now that the problem of overvalued assets has been recognized, everyone is trying to exit by selling them. Thus, home prices are spiraling down and the mortgage-backed assets behind them are falling in value as well. This exacerbates the paper wealth loss experienced by consumers and whacks the high-flying financial sector that led the stock market to record levels. Export growth has been the one major bright spot, but now European Union countries and Great Britain are slowing, so they are likely to buy less from America. Consumers are hanging in but are already maxed out with debt and will find it hard to grow their spending. Lower oil prices will help, reducing the oil tax imposed on consumers, but even at $100 a barrel, the burden is heavy. We consume 21 million barrels a day, 60 percent of which is imported. The math is easy and stunning.
Economy not listening to indicators
Business owner optimism has been at historically low levels all year, matching readings last seen in the 1980–82 period. The difference is that inflation is less than 5 percent compared to two to three times that back then, and unemployment was more than 10 percent compared to the current rate of less than 6 percent. Although historically weak, hiring and spending plans are much stronger than in the 1980–82 period. But expectations for the economy and sales growth are depressed and have been all year. The real economy just refuses to match the pessimism, and that is good news.
However, earnings are not doing well. Although the percentage of owners raising average selling prices is the highest since the early 1980s (more than 40 percent are reporting higher selling prices), it hasn’t been enough to prop up profits. Weak sales and higher labor costs (raising the federal minimum wage hurts employment and inflation by making firms pay more for the same work and employees more expensive to hire) are dominating profit trends. Twenty percent of all owners say inflation (through the back door) is their top business problem, more than taxes or weak sales or any other single factor. Falling oil prices will help some, but the core inflation rate (excluding food and energy) is apparently not responding to the weak economy as expected. The incidence of price hikes is supposed to fall, not rise. This does not bode well for inflation this year.
Capital spending has been weak all year, despite an expansionary monetary policy designed to lower the cost of money. Certainly Wall Street institutions have benefited, but it is less clear that banks or businesses on Main Street have been helped much.
Here’s looking at you
Amazingly, there has been virtually no sign of a "credit crunch" on Main Street since the Fed declared its existence. This has helped keep the economy running. The economy peaked somewhere in the November 2007 to January 2008 period and has not made much headway since. Excluding export demand, domestic spending has declined.
Hopefully, small business will take charge of economic growth in the coming months and start the economy on a positive path before a real recession sets in. Meantime, look for more inflation and rising unemployment -- not like in the 1980s, but not good.
