I’m no economist. I’m just a lowly consumer. Because of that, I’m obviously not qualified to have an opinion about the current state of the economy. However, I take issue with some of the things that the media is saying.
1. Consumers are being hit hard at the pumps
Sure, gas is up anywhere from 40 - 60 cents above what it was this time a year ago
…Which, on a 10 gallon tank, is about an extra $6. I think most people will agree with me: an extra $6 at fill-up every week and a half isn’t going to break my bank. Seriously.
2. Increased costs of Rice and Flour are greatly affecting shoppers at supermarkets.
No? I think I pretty much fit the description of the average consumer, and…I’m gonna go out on a shaky limb here and say that I’m not detecting an appreciable difference in the cost of groceries. Certainly not enough to make me wince. Certainly not.
3. Because of the shaky economy, consumers are reluctant to spend.
This seems to be largely based on three things. The two points I’ve discussed above, and some sort of data that every media outlet but me has access to. I haven’t seen any stastical data to back up the media consensus of a downturn in consumer spending. Is there data like that? Probably. Will we ever see a full report that actually means anything? Probably not.
These are the reasons that the economy is, allegedly, suffering (that’s what makes 3 so interesting, it is a cited as a reason for the economic woes, while simultaneously being described as a response to them. This is fine, and it works out, but I think it’s also a little Chicken-Egg-Black-esque.(for all you Wilco fan(s))). But what are the signs that the economy is suffering? Where is the evidence? The media seems to be keying off of a few things.
1. In the last 14 days, one airline has gone bankrupt, one has filed for bankruptcy protection, and two have initiated a merger, all in response to economic pressure.
Delta had a complete Reorg a little over a year ago, invalidating a few million dollars worth of stocks in the process, to avoid completely shutting down. Didn’t know they could do that? Neither did I. Airlines struggling is not a new thing, and while it may be related to profit margins, I submit that it has a lot more to do with poor management and the necessity to cut prices to the absolute bone, brought on by stiff competition without innovation. What do I mean? The checkin process is essentially not different than it was 20 years ago, and it probably costs just as much from a human resources standpoint, but ticket prices have come down over 200%. I think this is indicative of the airline industry…they have lowered costs substantially without making any sweeping changes to the way they do business that allows for these cuts. What do we lose, then, if we aren’t becoming more efficient? Quality. We’ve seen a significant decline in airline service, timeliness, and quality in the last two decades.
Of course, I’m not an industry insider, and this is all wild speculation, but I don’t think you need to be an industry insider to know that spiraling costs with no change in production methods cannot result in increased profits or improved customer experience.
What I’m saying is, Airlines have been troubled for years. It’s not a surprise that a few of them are going out of business. We’ve seen it in the past, not coupled with the other “signs of the times”, and had no major panic over it.
2. The Sub-Prime mortgage implosion.
First, lets clear the air. Do I feel bad for people who are losing the homes that they can’t afford and shouldn’t have bought in the first place? Yes. I do. Losing your home must be a terrible, awful, horrid feeling. Do I think they deserve a bailout? I’m sorry, no. Do I think the responsibility for their woes lies at the feet of the mortgage companies who issued them dangerous loans? No. If you take a loan and make your payment contingent on a continual increase in property value unlike any seen in history, you’re setting yourself up for financial ruin. I don’t care if your mortgage broker told you that you were qualified, and that it would be fine. Your finances are your responsibility, not his.
So we have a handful of homeowners (and mortgage companies!) that risked their financial lives on a really, really stupid idea of house futures. Now a large group of those homeowners are losing their homes, and the market is being flooded with foreclosures, which would SEEM to lower the value of homes. In fact, value isn’t changing at all. Value did not change while the bubble was inflating, only perceived value did.
This normalization is always seen after a bubble bursts. Property values will return to a level at which they can be supported by their local economies. Some people will lose their credit ratings and have to start over. Is this the end of America as we know it? I sincerely doubt it.
The government has already shown a willingness to help large financing companies keep their heads above water. The government is taking steps to protect the core economic foundations of the country, and they have indicated that they will continue to do so. A decline (to the correct level) of home costs, and some people being turned out, is NOT an economic downturn. It is a market correction.
3. Home sales are down
Duh? Do I need to address this? Loans are becoming sane again, and there isn’t a frenzy of people who are buying and selling homes from each other, climbing some imaginary money-ladder built on debt. Little known secret: imaginary money-ladders built on debt invariably lead to pain. Nolie.
But home sales being down in the wake of a housing bubble bursting ALSO isn’t surprising.
What would convince me that a recession was starting? Home prices dropping below the floor that the local economy should, and naturally does, create. Irvinehousingblog.com did the math for me, so go there for the charts. There are formulas for this stuff, it isn’t witchcraft.
What else? National unemployement rate rising appreciably. At the end of 2007 it was 4.8. In March of this year it was 5.1. This is not significant.
One more? Sure. ANY sign of recession that I can see with my own eyes in my day to day life. Well established businesses downsizing, stores closing, successful companies stock prices declining…Am I seeing this stuff? Not really.
So…if there’s a recession, and I can’t see it anywhere around me, and no one that I know is feeling it…where’s the recession?