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Based
upon the nation’s GDP growth in second quarter 2008 one might conclude that
the national economy is performing nicely.
For example real GDP grew by an annualized 3.5
percent during the April - June time frame
(Table 1). However,
other economic indicators suggest that the economy is having a much harder
go of it.
For example, the national unemployment rate has been
trending upward since early 2007 and by July 2008 reached 5.7 percent.
Given the mixed message sent by GDP and the
unemployment rate, I would like to explore the matter further and discuss
other variables that will give us insight into the health and condition of
the economy.
As most everyone knows
our current economic situation has been and will continue to be heavily
influenced by the collapse of the sub-prime housing market.
Many economists believe that it will be well
into 2009 before the effects of the sub-prime housing market collapse on
homeowners and its impact on the nation’s financial institutions cease to be
a drag on the economy.
Current housing indicators show that prices
continue to tumble across the nation.
Since mid 2007 housing prices have fallen each
and every month.
New single family housing starts have declined
from about 1.4 million starts in July 2006 to 0.6 million starts in July
2008.
Sales of existing homes in July 2006 were about 5.5
million units; by July 2008 only about 4.4 million homes were being sold.
The contraction in housing activity hurts not
only the construction sector, but the entire economy as well.
For an excellent discussion of this one should
read Kevin Bahr’s CWERB special report from May 2008.
In the report he details the economic
relationships among the housing market, homeowners, financial institutions
and the overall economy.
Other indicators of economic performance such as
industrial production, capital investment, manufacturing, motor vehicles and
parts, the stock market, consumer price index, and energy costs all suggest
that the economy is doing more poorly than what the GDP figure alone says
about the situation.
Perhaps most importantly, employment at the
national level has contracted by about 700,000 jobs since June 2007.
Thus, it becomes apparent as to why most people
feel that the economy is doing more poorly than what the GDP figure
suggests.
Given that the economy is now experiencing inflationary pressures and rising
unemployment, the job of the Federal Reserve has become much more difficult
than in past years.
Our nation’s central bank must carefully weigh
the risks of providing more liquidity and lower interest rates to stimulate
economic growth against the inflationary pressure that this action would
surely cause.
Until very recently the Federal Reserve felt the
greatest danger to the economy was recession.
The Federal Reserve acted very aggressively in
lowering interest rates and providing needed liquidity to ailing financial
institutions.
The stance of the Federal Reserve has changed to
a degree.
Our nation’s central bank’s monetary policy has shifted
to a more neutral position.
The FED now recognizes that inflationary
pressure, even though inflation is expected to recede in the months ahead,
needs to be monitored closely.
Thus, it is unlikely the Federal Reserve will
make a dramatic move to reduce interest rates in the months ahead.
Economic growth would have to take a huge nose
dive before the Federal Reserve will provide more liquidity to the economy.
On the fiscal policy front the tax rebate checks
seemed to have had a smaller than hoped for impact on consumer spending.
If the economy appears to be faltering we may
very well see another round of rebate checks from Washington.
But, until the housing market, consumer
finances, and financial institution balance sheets become healthy the
economy will continue to struggle.
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