November 30, 2007
Reasons To Freak Out About The Economy
Ignore those FOX News chyrons -- today's Wall Street rally has nothing to do with how healthy the economy is, and everything to do with how unhealthy it is.
"The combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead," Federal Reserve Chairman Ben Bernanke said yesterday. Stocks are up today because investors are relieved that there will probably be another rate cut when the Fed next meets on Dec. 11. No one is overjoyed at why that cut is needed.
The Bush administration still wears an upbeat face on the economy, trumpeting October as the 50th consecutive month of job growth and noting that GDP has grown an average of 2.8 percent every year since 2001. But behind the scenes, Treasury Secretary Henry Paulson and HUD Secretary Alphonso Jackson are negotiating a deal to freeze interest rates on certain subprime loans in order to help struggling borrowers fend off delinquency and foreclosure. Reports of the pending deal are also driving the surge on Wall Street, as the housing market crisis is one of the main forces pushing us close to a recession.
Former Treasury Secretary Lawrence Summers is one of the more prominent economists to predict the U.S. is now more likely than not headed for recession. In an op-ed published by the Financial Times on Sunday, he wrote of the housing freefall, "We do not have comparable experiences on which to base predictions about what this will mean for the overall economy, but it is hard to believe declines of anything like this magnitude will not lead to a dramatic slowing in the consumer spending that has driven the economy in recent years."
A year ago, when weekly measures showed pessimism about the economy despite a booming stock market, that was read as a trickling down of concerns about the overall direction of the country -- what pollsters refer to as the right track/wrong track measure. In a few of our Poll Track columns, we also attributed the disconnect to overall negative attitudes toward the Bush administration because of the Iraq war, among other issues.
But in some ways, consumers have been ahead of the curve on economic concerns. One reason they feel worse off is because, in real terms, they actually are worse off. After adjusting for inflation, average family incomes have declined since 2001. That is a remarkable trend that doesn't get nearly enough play in reports about the U.S. economy. Factor in rising gas prices -- the cost of filling up a tank is roughly double what it was in 2001 -- and other costlier expenses like housing, and we've got a real psychic problem on our hands.
"Confidence will return the first day an official statement about the economy proves to have been too pessimistic," Summers wrote. Consumer confidence and spending have already significantly slowed (subscription). The economy now strongly rivals the war in Iraq (subscription) as the top concern of voters in the 2008 election.
Average-income families are pinching pennies this holiday season in expectation of rockier times to come. Wall Street will feel that, of course, but in human terms, the needy are already really feeling it. The New York Times reported today that shortages at food banks are approaching crisis levels. That Americans are giving less right now may not be all that surprising. But AP reported something startling earlier this month: An unnamed "major U.S. bank" has cut back its donation to the Food Bank for New York City this year by 60 percent.
It isn't just the poor who rely on food banks and other charities. More and more middle-income families are relying on these services, too. (That AP report and this one are full of alarming stats from food banks and homeless shelters across the country.)
"The fallout from the credit crunch has been so intense that some feel a pain barrier may have been breached," the Economist writes this week. That diagnosis is clearly more true for some Americans than others.
This week's National Journal has a story offering answers to questions about a possible recession (subscription). "The Diane Rehm Show" aired an informative roundtable on the economy yesterday; guests included Wall Street Journal reporter Greg Ip and economist Ken Goldstein.
Posted at 12:30 PM
Posted to:
Bush Administration, Economy
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