U.S. Economy – Fear of Falling

OK so let’s try to unravel where the economy is going together shall we?

According to Investorwords.com the definition of a Recession is, “a period of general economic decline: specifically, a decline in the GDP (gross domestic product) for two or more consecutive quarters.”  Well according to a report on May 29, 2008 by the Bureau of Economic Analysis (BEA), the GDP rose 0.9% in the first quarter of 2008.  BEA is an agency of the federal government, specifically the US Department of Commerce.  hmmm…

A Depression on the other hand is defined by Investorwords.com as, “A period during which business activity drops significantly.  High unemployment rates and deflation often accompany a depression.”

Now, while both definitions include an economic decline, a Recession specifies a dropping GDP while a Depression includes high unemployment and deflation.

Deflation is defined at “a decline in general price levels, often caused by a reduction in the supply of money or credit.”  This can be caused by contractions in spending such as reductions in government spending, personal spending or investment spending.  I had an interesting conversation with a wealthy friend who owns a ritzy vacation home in the Tahoe area.  She explained that a friend of theirs – the top salesman in this very exclusive development – had as of the end of May shown two properties, yes shown two, not sold, not taken offers, shown.  And believe me, these properties are investments of the very wealthy.  I thought to myself if the wealthiest aren’t buying, who has any money?

Investorwords.com reports that deflation often has the side effect of increasing unemployment in an economy since the process leads to lower demand for goods and services.  Fewer customers at the restaurants equals fewer busboys, makes sense.

OK so we have a mixed bag don’t’ we?  Unemployment is way up but in the first quarter the Consumer Price Index was also up as were most of the indicators the Department of Commerce uses to calculate it.  So we are not seeing deflation so far.  But if spending drops, inventories will rise and the market forces will bring prices down to a level where people start to spend again.

So the federal government decided to send out a bunch of IRS checks to prop up the spending so deflation would not begin, at least not until after the election in November.  The problem is that skyrocketing energy prices are sucking up the money people would otherwise spend on goods and services.  The result is that companies are beginning the process of downsizing; witness the airlines.  Let’s face it, the price of fuel is the driver, but the lack of people willing to spend money on higher ticket prices is what’s causing airlines to downsize or close up shop.  It isn’t the price as much as the fact that people are not willing or able to pay it.  Consumers have reached the limits of their income or they are afraid to go further into dept.

Is next year going to be worse than this year?  I can’t see how it will level off in a year.  Nothing is going to stop the inevitable reductions in government spending because every municipality I’ve heard about lately has a budget in the red.  At the local level the main culprit is falling property values which results in lower property taxes.  Lower consumer spending results in lower spending and less state sales tax revenue.  Add in lower employment and the increased demands on government support programs and government is going to be forced to reduce their own payroll soon.

One of the key contributing factors in the last Depression was that World War I ended so war time production stopped abruptly and all the young men came home where few jobs waited for them.  So if the Iraq War ends tomorrow and all those young people come home and most are discharged, and the wartime production stops, what then?  Is it 1933 all over again?

So did we answer where the economy is going?  Probably not, but I think I saw a sale on asbestos hand baskets at Walmart.

Top Ten Indicators the US Economy is Bad:

1.            George W. says it isn’t

2.            Sharon Stone is an American, it’s karma, baby

3.            Gay Marriage, just channel Jerry Falwell, he’ll tell you

4.            Alan Greenspan took the Sorcerer’s Stone with him when he retired

5.            Bill Clinton did have sex with that woman, it’s karma baby

6.            Global Warming, ask a penguin

7.            Failure to control immigration, ask Michael Savage

8.            FEMA staged a coup at the Department of Commerce

9.            Gasoline costs more per gallon than milk

10.          Houses are affordable again