Things Aren't as Bad as They Seem - Barron's

Includes: DIA, SPY
by: SA Eli Hoffmann

While many financial journalists and bloggers seem to think the sky is falling (or, has fallen and will fall much further), Barron's isn't buying it:

The economy has often proved more resilient than is commonly thought - and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record.

What constructive factors, you ask?

Number one, the huge boost to consumer spending that will come from a decline in energy costs. While oil's run-up to $150/barrel was front and center, its equally dramatic plunge back to $70 has garnered scant media coverage. Natural gas is also off about 50% since early July.

$80 crude produces an 'energy dividend' of about $170B, which Barron's author Gene Epstein assumes will make its way back into the economy during Q4 and Q1 2009, boosting consumer spending - which accounts for 70% of U.S. GDP - by 3.5%.

But most of that, he concedes, will be counteracted by shrinking credit markets and eroded home values.

So add to the mixture labor income growth. Spurred by relatively healthy unemployment (6.2% is still historically low), and falling food and energy prices which could produce a temporarily negative CPI, real wages should increase, leading to real consumer spending growth of 0.9% in Q4 and 1.5% in Q1 - enough to push waning GDP growth back into positive territory. The potential of looser credit markets, renewed growth in largely stagnant capital investment, and depleted inventories should further fuel growth.

If I'm right, then, the only quarter of contraction this time around (barring revisions) will have been 2007's fourth, in which GDP fell at an annualized 0.2%. The economy won't be great through the end of 2009, but it should do far better than the gloom-mongers expect.


  • A Sunday article in the NY Daily News notes that consumers waiting for oil prices to drop with the same magnitude they rose may be disappointed: "Much of the crude oil price increases could not be passed on at the pump," EIA oil analyst Douglas MacIntyre notes, so gas prices simply don't have that far to fall.
  • Menzie Chinn notes a forecast released Friday night by Deutsche Bank gives a sobering new view of economic growth over the short- to medium-term, much worse than it thought just two weeks previously.
  • Peter Schiff's outlook is almost diametrically opposed to Barron's'. "The structure of the U.S economy today is far weaker than it was in the fall of 1929," he writes. "Years of reckless consumer borrowing and spending, and enormous trade and budget deficits have resulted in a hollowed out industrial base and an unmanageable mountain of debt owed to foreign creditors... This will not be your grandfather's Depression. It may be much worse."

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