May 12, 2008 1:32PM
The Argument Against the Doom and Gloom Crowd
By Elizabeth MacDonald
The doom and gloomers are out in force, but don’t be fooled by their blinkered concretism when it comes to the health of the US economy.
Listen I’m a realist, I’m no Pollyanna, I know there’s acute pain out there and that this economy may be in the weeds for a few years now. We won’t know whether the recent 0.6% GDP quarterly growth rate gets adjusted downward for a few months from now, so we won’t know whether the US economy is in a recession. Many say we are.
But the doom and gloomers ignore the fact that the US economy has been growing at breakneck speed for five years, and any growth, no matter how fractional, is huge as it comes off a massive $12t economic base. It’s more, too, then the fact they shy away from this bit of info, that the US economy has added something like the equivalent of five Saudi Arabias, or one Great Britain or China since the the Bush tax cuts of 2003.
The doom and gloomers ignore too this fact, that financial booms and busts have been a hallmark of the world economy historically, with more than 30 such severe busts since the first one, the south sea bubble of 1720 and ending with the ‘87 crash, according to Charles Kindleberger’s “Manias, Panics and Crashes.” Since then, the US economy has seen two recessions, and two busts, the dotcom crash and now two more joined at a meta-hip, the housing and credit crisis.
A market pro also disgruntled by the crowd that wants you to slam your door shut and get out the nail gun is Brian Hamilton, who runs the stock market and economic research firm Sageworks of Research Triangle Park, NC. He says: “I am not sure that the news coverage remotely reflects what is really going on in our economy.”
Here’s Hamilton’s dose of reality, adding more to the broad-zoom perspective I have been advocating since the fall. Hamilton now takes the stage:
1.US employment: Today, our unemployment rate is roughly 5%. Last year at this time, the unemployment rate was 4.5%. Five years ago, the rate was 6%. The average rate of unemployment over the past 50 years is 5.86%. So, the rate of unemployment is higher today than a year ago, but it is by no means stark. A fair number of economists have set the “natural” rate of unemployment at about 6% to account for those people temporarily off of payrolls. Some would argue that the current trend is bad, but they typically go too far in assuming that small trends will become long-term trends. (These are the same types of forecasters who, in the 60s, projected overpopulation would cause worldwide economic calamity);
2. Disposable income: The average household income in 2006 was $48,201. In 2005, it was $46,326. Ten years ago it was $38,885. Real US disposable income has been rising nicely for over 40 years. On balance, it would be extremely difficult to contend that people have a lower standard of living today than five years ago;
3. US inflation: The current rate of inflation is 3.98%. Last year, it was 2.78%. Over the past 50 years, the average rate has been about 4.10%. While gas prices are definitely a problem in the US right now, especially for lower and middle income earners (and especially with relation to our dependence upon foreign oil), overall price inflation is acceptable and even positive. Do you remember the late ’70s? Starting in the late ’70s, Paul Volcker’s Federal Reserve made a great effort to curb the devastating effects of inflation in the United States;
4. U.S. interest rates: If you want to buy a house today, the average 30-year mortgage will cost you 5.97%. Ten years ago, the same interest rate might have been 7.13%. Thirty years ago, the rate would have been 9.2%. The “credit crunch” we are experiencing (whatever that is; I have yet to hear an acceptable or uniformly applied definition of “credit crunch”) might be noise on the screen, but people and businesses are still able to borrow cheaply, which is all that counts on an aggregate level. In order for banks to make money, they need to lend money. Let’s assume that banks want to make money. If they lend money at low rates of interest and people are buying things, this component will be fine;
5. U.S. GDP growth: In the last quarter, GDP growth was 0.6%, which, while nothing to write home about, is positive, not negative. Last year, GDP growth was 2.2%. Five years ago, it was 2.5%. The average real rate of GDP growth for the past 50 years has been 3.31%. It is clear that GDP is slipping today, which is not good at all, but real GDP growth is still positive, albeit anemic. It makes sense that, after almost 10 years of high growth, it might slow down for a short time. (Keep in mind that the average “recessionary” GDP cycle has been about 11 months, while the average expansionary cycle has been about four years.)
Hamilton adds that: “So, while the US economy is admittedly slowing, if you use basic and reliable economic data, it seems clear that, despite what you hear daily throughout–almost literally–the entire media world, we are not in a recession.”
Comment by Mike in Chattanooga
May 12th, 2008 at 3:05 pm
Elizabeth - You Rock! I love an intelligent woman! My small construction business is growing dramatically. What recession?
Comment by Bill
May 12th, 2008 at 3:15 pm
Elizabeth, you are missing the most important ingrediant of all. Cheap energy. We cant move the economy without it.
In all past depressions and recessions over the last 158 years we have had cheap energy to drive technology to improve living for all and get out of economic jams.
You did touch on foriegn oil, but your not seeing the magic wand. Without the oil everything in the economy ceases.
We can always fix issues in the economy, but that resource alone is going to take us into a spiral like the world has never seen.
Based on your facts and statistics yes you’re right. But that is not the situation we are in.
Comment by juan too
May 12th, 2008 at 3:34 pm
We may not be in a recession, but…
…20 years ago the Dept of labor changed the way they calculate the unemployment rate. They fudged the figures and the process. They round “down”, effectively minimizing the actual number, or so my statistics prof told our class.
…Inflation is just under 4%? You’re kidding right? I heard an analysis the other day that said - if you factor in housing, energy, food, etc., it’s much closer to 7%.
…anyone who sells stock for a living wants his potential customers to believe in the health and wellbeing of the economy. No one wants to take a chance on a dog or a long term downer. find another expert please.
…the above being said, we have a very strong economy, especially if you factor in the fact that NAFTA and Chinese manufacturing have all but killed the manufacturing base in the US.
Strive for a little more balance, please.
Comment by Bryan L
May 12th, 2008 at 4:19 pm
This article is right on the FACTs.. Please help get this acurate and true messgae out to the Main Stream Media
Thanks
Comment by Mike
May 12th, 2008 at 4:28 pm
Great article!
Thanks for writing it.
Comment by Justin
May 12th, 2008 at 5:33 pm
it doesn’t matter. we signed away our freedom with the passing of the federal reserve in 1913. fractional reserve banking has proven to be destructive in all societies that have implented it. fiat currency based on the borrowers ability to pay back the debt is the nail in the coffin. it’s only a matter of time until we are slaves to international bankers.
Comment by David Wrixon
May 12th, 2008 at 6:14 pm
You haven’t understood the Credit Crunch at all!
Lending is about Risk and Reward. The Credit Crunch was lenders saying that the Rewards were not commensurate with the Risk. So what has Bernanke done? He has reduced the level of reward to lenders. What this mean is that foreigners won’t entertain lending to you especially in a Fed IOUs. It also means that all the smart money in the US is being invested in Eastern Europe and Asia. Loans may be cheap but they are not easy to obtain, unless I am missing something. In the UK, you get 125% Mortgages last year. now your are going to struggle to get 90% Mortgages, and even though the Central Bank rate has dropped, the average loan is much more expensive. Now house prices are dropping because nobody can afford to buy. And this is just the ripple effect of what is happening in the US.
I am sure many American’s will be cheered to read this article. I very much doubt they will be better informed.
Comment by cats
May 12th, 2008 at 8:18 pm
I agree with Brian Hamilton’s points. Unfortunately “good news” or even “not so bad news” about the economy doesn’t sell media time.
Comment by George
May 12th, 2008 at 9:52 pm
Most of the doom and gloom crowd, highlighted by the comments above, are those people too lazy to go out an get a job or a better one.
Comment by Mike
May 13th, 2008 at 12:22 am
The Doom and Gloom crowd is wrong about the weight of the financial mess.
If anything is to take down the US economy, it will be the constant barrage of energy issues for many more decades finally wearing down on its high-energy economy. For decades, the US has been an obese economy that can afford to shed lots of poundage and still be considered over-weight. The pain we are feeling, whether it is a motorist at the gas pump or the Citigroup CFO writing down another billion, is utterly laughable in comparison to the true poverty and economic disasters at many truly poor nations.
No, not even close. There will be no economic Armageddon this time, and the US consumers will be the last ones in the world to see empty rice bowls or corn bushels. Drive a little less on the road, drink a little less coke, eat a little less Doritos, and by golly…. we are doing just fine and still gaining weight.
Comment by Al Odom
May 13th, 2008 at 1:15 am
MY FEELINGS EXACTLY!! A LOT OF THIS GLOOM AND DOOM IS POLITICALLY MOTIVATED. I SEE A MUCH STRONGER ECONOMY.
Comment by Rob
May 13th, 2008 at 1:42 am
I cannot believe what I just read. I started to list all the economic factors that were totally ignored in this article, but that chore was much too daunting. It is amazing what dribble comes from the mouth of the ignorant and into the press.
Comment by NA
May 13th, 2008 at 6:44 am
This article is too simplistics, seems that it has been written siiting in a closed. How can u ignore things like time value of money, global inflation, emerging economies. Remember , now US is not the only place for investors, they are now turning, to emergin economies, whicj have much higher potential for growth. So even if there is any recovery, it will not be as good as previous one’s. The world has changed. Remember that.
Comment by Robert W.
May 13th, 2008 at 8:31 am
In the real world, of which I work an average of 60 to 80 hours per week, less than $50,000 per year, as an income is living on the edge. If you have no house payment, car payment and don’t travel much, this amount may be fine, but for a family of four, with a house and car payment, it does not take much to be ruined. Ten years ago, You might ask yourself:
What was gas selling for?
What were homes selling for?
What were cars/trucks selling for?
What was the cost of Health Care?
What were commodities, goods and services selling for?
Just so you know: I pay off my credit cards each month and never carry a balance. I have no equity line of credit. And what about no health insurance?
Just so we are clear, I do not feel that government should provide handouts for homes, gas, food or other issues that we in the real world are having to confront. The Fed needs to back off and the raise interest rates, as the value of the dollars I make continue to evaporate away.
Sincerely,
Bob
Comment by Carla, Ballwin, MO
May 13th, 2008 at 10:22 am
Like one of my all time favorite teachers said (Mrs. Sharp, 5th grade)-”If you lived in a city and father had a job, you could not sense the Great Depression of the 30’s.” The woman was so wise - I still remember her views of the world, she taught us the horrors of the Holocaust, and she gave great slideshows of her trips to exotic places. To make a lasting imprint on a ten year old is pretty cool, she was wonderful.
Comment by Arthur Hutchinson
May 13th, 2008 at 12:58 pm
Hello Cuz,
I engage major retailers daily and many are seizing the opportunity to strike real estate deals with developers for 09 and 10. Granted this is the typical pipeline for major buildouts, but stable Sage of the Plains type retailers with real stores and real profits are forging ahead albeit not at the harried pace fueled by the latest bubble.
Retailers are taking a more proactive that reactive stance in their decisions. This is a good thing for the long term as employees who depend on the positions created by these retailers will be less likely to fall victim to the cyclical nature of reactionary expansion.
So buck up Americans.
Comment by Denny
May 13th, 2008 at 7:35 pm
Unemployment…Dummy do you actually believe those stats? Take out the birth/death model adjustment and see what it really is.
Inflation….Dummy your are quoting CPI numbers not inflation. Inflation is defined as the increase in the money supply and credit. Its running well over 12%
GDP….Dummy if we are running a 10% inflation rate and growth is less than 1% how is the economy growing? If inflation was 0% and growth was 1% you would have a valid point.
Interest Rates….Dummy. Why are you talking about buying houses? Too many people are upside down to start with and who wants to buy an asset that is declining in value even if interest rates were 0.
Dummy…Dummy..Dummy Keep regurgitating the nonsense stats put out by the Feds. Remember they were the ones that caused the mess and they will get us out…right. You still listen for reindeer hooves on your roof Christmas Eve?
Comment by william mcniff
May 14th, 2008 at 8:45 am
The power to tax is the power to control. Pass the Fair Tax proposal and “we the people” will be much better off. The media and the politicians have much too much control.
Comment by lincoln
May 14th, 2008 at 12:13 pm
Denny, lay off with the insults there, and none of us listen for reindeer hooves anymore, we all have gas logs in our fire places with no chimney.
Comment by spterry11
May 14th, 2008 at 1:02 pm
great article. I plan to forward it to all my salespeople.
Comment by Harry
May 14th, 2008 at 7:06 pm
Denny:
What I love is intelligent conversation. Calling people dummy may make you feel better, but you lower others’ estimation of you.
I like eMac’s discussions; don’t always agree, but at least she putting out material for which we have the opportunity to comment. Who else does that? Disagree all you want, but use your manners.
Comment by Carla, Ballwin, MO
May 15th, 2008 at 9:48 am
Harry - My sentiments exactly! Elizabeth, keep up the smart reporting!
Comment by Kevin, PA
May 16th, 2008 at 7:31 am
“US inflation: The current rate of inflation is 3.98%. Last year, it was 2.78%.” Bull…the fed’s have been hiding true inflation since they started altering the way it is calculated back in 1993. Our inflation rate, if calculated in pre-’93 style, is running about 11.6%
The unemployment rate does not take unto account underemployment…people who hold one or two inadequate-pay jobs and cannot meet basic survival costs such as mortgage, water & sewer, groceries, heat, & gas for their car…oh, and food & gasoline prices are not figured into our inflation rates because their considered “too volatile” in their price swings…a more crooked and obvious method of cooking the books I have never heard of.
This economy is being kept afloat by short term, cheap cash & lies. In my opinion, the major correction we face will be allowed to occur probably right after the next presidential election, so we’ll have 4 years to recover (if we can) and forget who was in office when it happened…so as not to taint the next election.