U.S. Economy: Is the Glass Half Full?

Many of the basic problems in the American economy are rapidly being addressed – it's the "rapidly" part that's the problem.

A year ago, we had the following economic problems:

• The savings rate was too low.
• Credit card usage was too high.
• Energy prices were starting to soar.
• We imported too much oil.
• We bought and drove too many gas-guzzlers too far.
• Housing prices were too high.
• People were getting housing loans they'd never be able to repay.
• The dollar was very weak.
• There were signs of inflation.
• Jobs were being created overseas (and perhaps lost here).

Therefore, last week we got the good news that savings as a percentage of personal disposable income ROSE to 1.3% in September from 0.8% in August, a more than 50% increase! The 0.5 percentage point increase in savings was funded by a 0.2% INCREASE in personal income for the month AND a 0.3% DECREASE in spending. Americans took all the increase in income, matched it with a decrease in spending, and salted it away. The consequence – GDP (Gross Domestic Product) is down 0.3% for the latest quarter since we bought less stuff. The pain is today but there is a real promise from gain in the future from that additional savings (doesn't that help the banks, by the way?)

Credit card solicitation is down and banks are reducing some lines of credit. Those who complained about the avalanche of indiscriminate credit offers of prior years should be glad about this. Even those with good credit are using it less – just ask American Express (AXP). However, less credit does mean less spending.

The price of crude oil is down 60% from its high; gasoline is down nearly 40%; home heating this winter may be cheaper than last if the weather cooperates. This is hardly anything to complain about – although it does reduce some of the pressure for fuel economy and alternative energy.

Not only is the price of the oil we import down; the actual amount imported is down as well. That's a lot of money that stays home; that's a lot of money that doesn't go to unfriendly places. Some of the leaders of unfriendly places are unhappy about that – Ahmadinejad and Chavez, for example. It's too bad.

So far, despite the drop in the price of gasoline, we're still driving less and looking for more fuel-efficient cars to do our driving in. That's tough on gas-guzzler makers and certainly on workers in the auto industry. It's also a fleet-replacement opportunity as well as a reason why a lot of re-tooling will happen.

Housing is getting downright reasonable. Congress people demanded that Fannie Mae and Freddie Mac loosen credit standards because houses were too expensive for people to afford if traditional credit measures were used. Of course, the unwise credit not only put people in houses they couldn't pay for and prompted leveraged housing speculation, it also helped drive the cost of housing up even further. The volume of house sales is now increasing despite belatedly tightened lending standards – the buyers are super-qualified and are getting good value; the backlog of unsold housing is just beginning to shrink. However, this correction has hit the balance sheet of many Americans – especially hard hit are those that withdrew the gain in value of their houses by taking out second mortgages and spending the proceeds. The gain is gone and the debt is not.

Funny thing happened in this financial crisis, which has been labeled as "made in America" and taken as an indication of America's fall from economic power: much of the world suddenly wanted to hold dollars. The dollar has strengthened so much as a consequence that the U.S. and other countries recently intervened AGAINST it. Much of the rush to guarantee bank deposits in the rest of the world was from fear that capital would flee to the U.S. despite an only limited guarantee of deposits here.

A stronger dollar means less inflation. So does the economic slowdown – especially the reduction in the velocity of money (see this post). On Saturday morning, the New York Times finally got around to realizing that deflation is now the economic threat of the moment.

Since much of what we buy comes from overseas and the U.S. has become much more a services economy than it was, the bite of job loss when we cut back spending is also globalized. We still need plumbers and doctors (but not as many bankers); but we're not buying as much of what China makes. Those layoffs don't happen here.

So, why all the happy talk from me? There certainly is plenty of pain in what's happening economically. Real people are losing real jobs. People who'd hoped to retire soon have seen their savings evaporate. Deflation brings more than a cure for inflation; it also brings the threat of depression. Huge segments of our financial industry have been partially nationalized; we'll pay for that for a long time to come.

But we need perspective. This correction from excess has been violent and in many ways harmful but it HAS cured many of the excesses; the goal shouldn't be to reestablish them. We don't want housing prices to boom out of reach again; we don't want oil prices to go up or credit to be extended promiscuously; we don't want a banking economy based on the third derivative of valueless debt. We need to be wary of those crying "crisis" because they have a solution to sell. We've already gone too far in pouring aid in at the top of the financial system hoping (to put a good light on it) that it'll trickle down.

We will need to cushion some of the pain at the bottom of the economic heap; there'll be more need for unemployment insurance before there's less. We can't afford to let starved states cut back on infrastructure projects both for the sake of the infrastructure and for the sake of the economy. However, we also want the excesses that have been corrected to stay corrected – at least until the next bubble.

Comments

[CLH:]

Yes as you have so clearly shown. Capitalism corrects itself. Gov. help is never needed except for short periods of times.

Very good paper.

2008 Nov 02 08:33 AM

[dw57:]

not sure why any body things wages have gone up. if the IRS under pressure mind you eventually reports they haven't gone up, but down. and have been for a long time now! and that the great equalization that globalization was inevitably going to cause . that time is here.

2008 Nov 02 09:06 AM

[eternitus:]

I agree with many of your points... we are going through a healthy correction process that's started to remedy enormous imbalances that had built up over a very long time. Part of our continued prosperity was an illusion brought about by consistently declining interest rates... obviously an unsustainable situation.

Our political system contributed much to our folly. Politicians, most of whom face re-election every two years, are necessarily short sighted. They focus on "making things better now" in downturns but encourage the Fed to let the good times roll during booms. The result has been 25 years in which monetary policy was largely unidirectional... with the Fed dramatically lowering rates to limit downturns and never raising them quite as aggressively to smooth out booms and correct the imbalances caused by their intervention in the markets.

What we are seeing now is the logical conclusion of this 25 year period of declining rates. At rates near zero, we no longer have access to the tool that enabled us to manufacture additional GDP growth and limit recessions through leverage and asset price inflation.

The adjustment process will be painful, but we'll ultimately emerge with a healthier, more balanced economy. Ordinary people will be able to afford ordinary houses (did you ever sit down and try to do the math to see how a $70k family budget could support even a $200,000 mortgage? It's tough) and send their kids to college. Back to the good old factor inputs to generate growth... technology, labor supply and capital!

2008 Nov 02 09:29 AM

[OctoberFaith:]

declining rates of what pray tell?

2008 Nov 02 12:11 PM

[tedS:]

Hi Tom, -

Thank you for the insight and for the list of "problems" to watch for until the next buble :

>The savings rate is too low again.
>Credit card usage is too high again.
>Energy prices are soaring.
>We are again importing too much oil.
>We have gone back to the gas-guzzlers again.
>Housing prices are becoming too high again.
>People are offered housing loans they'd never be able to repay.
>The dollar is very weak.
>There are signs of inflation again.
>Jobs are being created overseas and lost here.

I'm going to be much better prepared this time.

2008 Nov 02 12:28 PM

[Philly Jim:]

Bottom Line: Inequality is naturally interwoven into the fabric of society and is what encourages us to reach for higher goals and without it, we'd be nothing more than cavemen. Congress must act as the Burkean representative in the future and do what is sensible, not what will gain them an numerically powerful voting bloc's favor. Forcing GSE's to "spread the wealth", did not work in the past and is what got us into this mess. Wallstreet gets the blame but really did nothing more than what they do best, move money around. Congress failed us.

2008 Nov 02 01:19 PM

[jadziasman:]

The optimistic bulls have reasoned that this recession is V-shaped and that we've moved to the right side of the V. It is what we're all hoping for. Let's all hope really hard.

2008 Nov 02 03:18 PM

[Richard Col...:]

Excellent article Tom -
Much better than the crap Cramer dishes out.
I agree with you 100%
Dan Kowkabany

2008 Nov 03 10:11 AM

[axelrod608:]

The glass overfoweth with credit and debt.

2008 Nov 03 11:27 AM

[Here's a th...:]

Excellent, clear, concise, accurate, uncommon sense as always.

2008 Nov 03 11:33 AM

[website:]

Tom Evslin :-
Your article easy to understend,I very much appreciate it.

Jan 01 05:37 PM