By Mark Pullinger
Each night at story time my son loves a bawdy set of kid stories titled Captain Underpants, in which two boys named George and Harold are tortured by their teachers who are invariably portrayed as authoritarian boobs. One of the funniest gags occurs when a teacher (Ms. Rible, Mr. Meaner, Ms. Anthrope, take your pick) makes an announcement to the class where good news is always tempered with bad news. The teacher will say something like “Today we are going to have a party”, and the class erupts in shouts of “Hooray”, only to be followed by the second announcement, “for my birthday” yielding a painful cry of “Awww maaan.”
If anything describes the economic roller coaster we are on right now it is this classroom scene. Good news is being followed by bad and bad by good ad infinitum. How do we make sense of all this? This week the stock market is up because of President Obama’s plan to buy out toxic assets and because home sales were up nationally in February by 5.1%. Home prices haven’t been this affordable for decades and interest rates are low (“Hooray”). On the other hand, 45% of sales are foreclosures, the inventory of homes for sale remains at a dismal 9.7 months, Illinois unemployment rose to 8.6% and is climbing, and Illinois home sales are down 29% over February 2008 (“Awww maaan!”).
To say the least, it is hard to predict the future right now. Even if the future is considered next week! I think it helps to step back and look at the fundamentals of our economy and try to get some perspective from the past. Since it is fashionable to compare this recession to The Great Depression of the 1930’s, lets consider the following:
- Employment: In 1931 unemployment reached 25%. Most economists agree that we are headed for 10 to 12 % unemployment. Unemployment is not expected to bottom out until 2010. This is more in line with a really bad recession like that of the mid ‘70’s. Certainly not great, but not even close to the horrendous unemployment of the ‘30’s.
- Banks: By the end of the 1930’s depression, more than 9,000 banks failed. Depositors lost ALL of their savings. So far 50 banks and lending institutions have failed since August of 2008. The FDIC raised their insurance to cover $250,000 in deposits, so most of the people involved did not lose their savings.
- Government Reaction: The Hoover Administration responded to its crisis with a policy of “retrenchment”, that is to cut Federal spending to the bone. The only economic force capable of dealing with the financial crisis (i.e. the Federal Government) thus was pulled to the sidelines. Both President’s Bush and Obama massively intervened in the economy, to the tune of some $10 trillion. To put the amount of government intervention in perspective, the annual GDP of the US is $14 trillion. Economists argue over whether it is too much stimulus, leading to massive inflation later on, or not enough. Most agree that it will eventually move the economy forward.
- Trade Policy: In 1930 Congress passed the Smoot-Hawley Tariff Act, raising trade barriers and deepening the World Depression. We have seen some worrying legislation from Congress, namely “Buy American” provisions, in recent legislation. For the most part, however, our government has cooperated with foreign governments on trade policy and even included foreign banks in the TARP funds. In 1930 trade represented 3% of GDP. It now represents 30% of GDP, so raising trade barriers would be disastrous for our economy.
So much for 2009 vs. 1930, but what is going on now that might indicate progress we are making in getting out of this swamp?
- One of the great fears right now is deflation, a spiral of falling prices with no end. So far this year retail sales have risen by 1.8%. Retail sales drive 70% of our economy, so this is very encouraging.
- The Producer Price Index fell 1.9% in December 2008, but has increased .o8% in January and 1% in February of 2009. This is hugely important because it indicates that demand for goods still exists. Oil prices are up 25% in the past 4 weeks also indicating strong demand.
- February housing starts are up 22% over January 2009. It is true that starts are down 47.3% over February 2008, but if monthly increases continue then we are headed in the right direction.
- Home sales are up nationally 5.1%. The key figure to watch is housing inventory, which has been static at about a 10 month supply of homes at the current absorption rate. A normal supply is 3 – 4 months. In Chicago, sales were up 3.9% since the first of the year and in Illinois overall homes sales were up 8.9%. California may be leading the way as first time buyers drove up California sales by 42% in February, 58% of which were foreclosures. Hopefully lower prices, interest rates, and the Obama administration’s plan to help first time buyers with a tax credit will increase home sales. First time buyers will probably be the key to sopping up the excess inventory. When the inventory figure starts to go down, you know that we are making progress.
- Shipping rates are up 144% over the first of January, indicating world trade is improving.
- Banks are reporting profits early in 2009, indicating that this important sector may be making a comeback.
The stock market is betting on our future, so by definition this is not “irrational exuberance.” While the general economic news remains downbeat there are now some very hopeful signs that we may be reaching the bottom. According to the recent UCLA forecast the recovery will be slow in coming. Maybe so. But national economic trends remain outside the control of us mere mortals. Patience, persistence, sticking to basic sales principals and a positive mental attitude will be the keys to your personal recovery plan. Staying away from the news, something I find almost impossible to do, is a great way to stay positive. If you need a laugh, try Captain Underpants.