Winter Break WK #2: “Take another look: Economy’s not so bad”
December 21, 2008
BRIAN HAMILTON is chief executive officer of Sageworks Inc. Contact: brian.hamilton@sageworksinc.com
Much has been written about the economy, and, if you accept certain assumptions from what you read, you might think that we are in the midst of a global depression. It’s important to put the current economy in perspective.
Last quarter, U.S. gross domestic product fell at a rate of 0.5 percent, which means that the total value of goods and services produced in the country fell by a half of one percentage point last quarter over the previous quarter. For the first two quarters of this year, GDP grew by 0.9 percent and 2.8 percent, indicating that economic growth is relatively flat this year, but that it is not falling off a cliff.
This isn’t the first time GDP has fallen, and it won’t be the last. The last decrease in GDP was in the fourth quarter of 2007, and before that was in 2001. A decrease in GDP after almost six years of increases is not positive, but almost predictable.
Some would say that we cannot only look at GDP, so let’s look at other factors. Interest rates remain at historically low levels. Loan volume in the country, according to the FDIC and contrary to what you read about the credit crisis, actually increased last quarter compared to the same quarter last year.
How about employment? According to the Bureau of Labor Statistics, unemployment sits at 6.7 percent. At this time last year, unemployment was 4.7 percent. The decrease in employment is not favorable, but historically an unemployment rate of 6.7 percent is not close to devastating.
The 50-year historical rate of unemployment is 5.97 percent. Most economists agree that the natural rate of unemployment, which is the lowest rate due to the fact that people change jobs or are between jobs, is around 4 percent. So, today we sit at 2.7 percent above that rate.
Once again, the very recent trend is not good, but it is certainly not horrifying. Americans have good hearts and empathize with those who are unemployed, yet it would be easy to go too far in our assumptions on how the working population is currently affected in aggregate.
Look at personal income today. Personal income is income received by individuals from all sources, including employers and the government. Personal income rose last quarter compared to a year ago, according to the Bureau of Economic Analysis. Compared to five years ago, personal income has risen by 32.1 percent. Even considering that inflation was 18.13 percent in this period, people are generally making more money than they used to.
Next, there is inflation. The inflation rate measures the strength of the dollar you hold today as compared to a year ago. The inflation rate is currently 3.66 percent. Over the past 50 years, the inflation rate has averaged about 4.2 percent. Inflation remains well within control.
Now, the skeptics reading this will undoudebtly point to other (I believe, far lesser) statistics that validate their gloomy view of the economy and the direction of the country. I ask the reader: If people are employed, are making good wages, can borrow inexpensively, hold a dollar that is worth largely what it was worth a year or five years ago, and live in a country where the value of goods and services is rising, tell me exactly where the crisis is?
There is no doubt that the economy has slowed, but slowness does not equal death. It is true that the financial markets are a mess (and the depreciation of the value of equities is both scary and bad), but analysts typically go too far in ascribing the fall of the financial markets with the fall of a whole economy. The markets are an important component of the economy, but the markets are not the totality of the economy.
No one can say whether conditions will worsen in the future. However, we have learned that the American economy has been tremendously resilient over the past 200 years and will probably remain so, as long as the structural philosophies that it has been built upon are left intact.
Question for Mr. Kautzman: Can you have a financial pundit?
Answer: If you mean a financial expert or a political expert knowledgeable about economics, yes.
The author sounds like he has done his research and I agree with him on all his points. We are simply slowing down, which if you ask me is a very good thing. The reason it is so good is the whole phantom money thing again. I realize that our economy partly runs off of phantom money. In recent years the phantom money has gone too far. Couples right out of college have come to expect that they are going to live in a huge house and have two cars and a gym membership. Sorry, they’re not. Not unless they want to be in debt up to their ears and still be paying off student loans when they are old and grey. There is an entire generation that is currently buying houses that have collectively decided that debt is okay. It is not. That is why the housing market is dropping, because these same couples and families have finally had their debt catch up with them. I don’t think our economy is that bad right now. I also think it would be RIDICULOUS for the government to step in and extend their long reaching arm into the auto industry and the stock market. They don’t need to nor do Americans want them to. (Well, some do and some don’t) Our government needs to look at the facts without all their hyped up emotions and fears and see that the economy will be fine and so will America.
Connection: This author seems to be a proponent of trickle down economics. Looking at the trend of recent years and seeing that this is natural, he does not think the government needs to freak out. He seems like a smart man.
The market has slowed, but that is about it. This article did a fascinating job at pointing out the issues that are most obvious to economic success and failure. The only road that we are following to failure is a little higher unemployment rate. But it still isn’t even that high, and is probably nothing to worry about. The media can really have an impact on the global economy. By throwing around the “D” word, people are less likely to spend their money, and more likely to hold on to it under their mattress. Well, this causes the markets to do badly, because there isn’t money to circulate in the markets. This is what leads to a depression – when people are stingy with their money. As Mr. Preston always says, “The economy does well in times of greed and poor in times of fear.” Well right now we are in a time of fear. But that is about it. If people would actually get informed about the issues, we might actually have a better economy.
Connection: The power of the media- the media has told us all that we are in an economic depression. But, according to the real deal, the media has only been focusing on a few issues, such as the financial markets. The influence of the media is very very powerful, as I have now just experienced first hand. I always thought that we were in an economic recession until I read this article. Really, with the Bailout plan and everything, it’s just a few company heads making bad decisions.
“The markets are an important component of the economy, but the markets are not the totality of the economy” (Brian Hamilton). I was waiting for such a quote as this one. The article fascinated me by covering many different aspects of economy, but the part about financial markets quickly drew my attention. Americans need to remember that market success is not the only thing promoting overall economic stability; it’s just another piece to the puzzle. Again, enough people are so uninformed when it comes to political updates that they hear one bad thing and stick their heads underground in an attempt to escape the harsh realities.
“No one can say whether conditions will worsen in the future” (Brian Hamilton). This is true since even the “financial pundits” conjured by Rachel D aren’t able to predict what will happen in the cloudy financial future.
For now, only time will tell if the measures set in place by the government and active politicians will have any measurable effect. I suppose most Americans would equate government success with their own happiness. Nevertheless, if government intervention is the best course for any particular issue that comes up in the near future, we can only wish it luck and hope that conditions do improve.
Connection: Biased media coverage. Reporters know that viewers are more likely to give their full, undivided attention to a news story about the depressing economy rather than some kid who saved some dog in some town in some state (you get my point). When people hear the word “depression,” it seems like they assume that mostly every part of the economy is experiencing difficulties (stock markets, housing, employment), which makes them hold onto their money even tighter. Since these people are so uninformed, they in turn are contributing to the vicious cycle.
It was very nice to read an article expressing this point of view. Everyone seems to be so frantic and worried about our situation that they forget to really pay attention to what is going on. Yes, our economy is no longer booming. Yes, there are people going out of work. Yes, it is becoming more difficult for most American families to own 3 SUVs, a Hummer, and the home that they could not afford in the first place. I know that this sounds harsh, but America needed a wakeup call, and we got one. I do feel deeply for those hardworking Americans who are loosing their jobs and struggling to stay afloat due to no fault of their own. However, it is very hard for me to have sympathy for those who have decided to substitute plastic for cash and to take out loan after loan to buy, not paying for food and a roof but for cell phones, cars, and flat screen TVs. I was very surprised to learn that our inflation rate today is relatively low when compared to inflation rates over the last half century. Economic scholars make it sound like we are struggling to survive. I understand that some Americans are truly struggling to keep their families afloat, but many of those who are “suffering” from the economic crisis are simply struggling to pay for the things that they shouldn’t have bought in the first place.
Connection: Great Depression
It upsets me to hear people compare what we are experiencing today to the Great Depression. Now, our unemployment rate sits at 6.7%. During the height of the Depression, nearly 1 out of every 4 Americans was without a job. Banks are not disappearing over night. Soup kitchens are not appearing on street corners. Although Mt. Spokane is in a farming community, I have not heard of a single kid dropping out of school to sell eggs on the streets. Although I feel for those who are truly struggling, we have to realize that most of us are doing just fine.
I am in complete agreement wit this article. No, I don’t have all the facts besides what I just read; and I am aware that this makes me one of those people who “accept certain assumptions from what you read.” Contrary to that statement I am also aware that the media likes to make things all about the drama. It’s almost like they are in highschool all over again hoping to see that one guy or girl do something embarrassing so everybody can talk badly of them. It’s ridiculous. I am growing more and more disconnected from the media and even TV in general, it’s just so hard to get the flat-out truth! I try to be a Optimist when it comes to situations like this one, that’s the only thing that really helps. When people always strive to find the next problem or defect in something they never get the chance to appreciate the perfection of that same thing. I know people lie, I know people like to be right, even if it means sacrificing the truth. What we really need now is access to the truth, in these times people shouldn’t be trying to pull one over on us just for the sake of being right, they should be looking out for us. Only when we know the true economic situation can we do anything about it.
CONNECTION:
I could say that they connection between what we’ve learned in class and this article is that the media is untruthful but really I think the better connection is ethics. Only people with no real morals and ethics could lie to people to scare them or whatever the purpose. Maybe the media and economists didn’t believe over reacting to things made that big of a difference to the American people, but it does. People need filters and need to look at the facts before they start making stupid assumptions. We all know what it means when we assume things.
This article is actually a pretty good article in terms of countering current consumer panic with facts that can contradict and assuage some of the fears of the masses. Some of these things, I did not know about, like inflation rates. This article really pointed out some of the facts out and took away some of the fearful spin that some pundits have been placing on it. I must admit that it is nice to see someone stepping up to attempt to quell the panic. However, I do not the article completely addresses the matter. While the article points out that the facts of the matter only point to an economic slowdown and not recession or depression, it fails to take into account the mentality of the consumers. Once the masses start to believe that a recession or depression has begun, odds are that it hasn’t actually happened yet and they will cause one with such thinking. If the status of the economy in the minds of the masses was only based on the facts of the issues, then nobody would be extremely worried about it at the moment. However, since it is not, we have the panic, fear, and worry that are currently going on today.
Connection: Paradox of Mass Economics (I know I just made that term up, but bear with me until I explain it) and the influence of the media. By applying the Paradox of Mass Politics to the economy, we can see that the masses are not really educated about how the economy works and are blinkered to only focus on certain aspects of it, like the stock market or the housing market. The media furthers such blinkers because it is primarily what the American consumer is focused on and it is easier to talk about in short periods of time. Also the media has been a power-pusher for spinning tales of economic woe and coverage of the bailout, which further decreases consumer confidence.
There are to ways to respond to the author and his article. The first way is to argue with is his statistics and “This isn’t the first time GDP has fallen, and it won’t be the last. The last decrease in GDP was in the fourth quarter of 2007, and before that was in 2001. A decrease in GDP after almost six years of increases is not positive, but almost predictable,” does not help his case. So what he is saying is that we can expect a depression because we have had an increase in gross domestic product in the last six years , so it is now time for it to decrease. The second way is to agree with the author in the fact that “compared to five years ago, personal income has risen by 32.1 percent. Even considering that inflation was 18.13 percent in this period, people are generally making more money than they used to.” There are positive things going on that people to not tend to see. I tend to agree with the author that we are not in a depression, nor are we headed toward one. The gross domestic product has decreased and unemployment has increased, but both by a small amount. this should be expected after six economically good years. It will eventually go back to where it was in due time.
Connection: Part of the reason that this article was made and the point that the author was trying to make was all about the mass media. Media today only shows the downs because that is what people watch and read. If people were to do their own research, then they would relive that the mass media is not always right and that this author is.
In response to Tommy Urann,
I can definitely empathize with you when you say you feel as if you’re “growing more and more disconnected from the media and even TV in general, it’s just so hard to get the flat-out truth!” (Tommy Urann) The media has a ridiculously powerful influence over Americans, and those guys know it, too. Not only are they aware of such control, but they manipulate our minds without limitations. Having said that, it really does feel like high school all over again, with enough drama and scandals to write an impressive soap opera script. I also try to be an optimist about these things, but it’s a difficult journey. It’s definitely frustrating when good news is immediately replaced with bad news. For example, gas prices have dropped significantly (especially compared to last year’s prices at this time), but the auto bailout, housing crisis, and college tuition struggles have swooped in to wreak havoc on the average American’s small level of optimism. So to sum up the author’s argument: the economy’s not so bad, because it could definitely be worse.
In response to Jonathan Dyer:
I know this is going to sound as if I’m playing the devil’s advocate, but reading your post got me thinking: Is it possible that those trying to comfort us are exaggerating, as well? Think about it. If people are willing to draw in more viewers by constantly preaching about how we’re in for another Great Depression, doesn’t it seem fitting that, perhaps, there are those who wish to cause people to believe there is absolutely nothing out of the ordinary? I’m not saying that that’s the specific goal of the author in writing this article, but you never know.
Nor am I saying, though, that the reasons people would put the economy in a better light are the same as the reasons people drag it down. It could be that the more positive are doing this because they want people to regain faith, even if what they believe and read is somewhat untrue. In the end, it’s probably better for everyone if a majority of people believe the economy is better than it is than for them to believe it worse. There’s more chances of stimulation to bring it to the level that people believe it to be.
In response to Meagan, she is right. This article is refreshing. It is good to hear the other side of view on the economy. Not because I haven’t bought into the bad economy thing, I have, I’ve been hearing it on the news every day for months. But Meagan’s right. The statistics in this article are good. They point toward and economic slow down not a depression. “They” say that this is the hardest economic times in a long time; the largest depression. I don’t really doubt that, but I do think that (after hearing it from Meagan) this probably shouldn’t be compared to the Great Depression. For some people, it seems that way. I have watched plenty of stories on the news where both parents of their family have lost their jobs due to failing markets. However, on the whole, unemployment is no where close to what it was during the Great Depression. This article points out the highlights of our economy, such as the in-control inflation rates and the low interest rates. However, one thing I do hope, is that this really is just a slow down. Because so far, things havn’t stopped “slowing down.” I guess we’ll see.
In Response to Megan Barnes:
I agree with Megan that it is refreshing to hear another side of this seemingly one-sided story. Yes it is true our economy isn’t booming like crazy anymore but that is almost inevitable after our long boom. Megan has a good point when she says the people struggling aren’t necessarily the ones who put themselves in that situation. Those who have lost their jobs may have been the most responsible Americans of all, but due to people who buy things they can not even dream of affording these workers are having hard times. Like any boom or decline in economics I am reminded of a quote, “This too shall pass.” Almost nothing is permanent, and as long as people due indeed learn their lessons and become more responsible for their own actions, things will turn around. I am also very happy with Megan’s connection, things are realistically not comparable to the Great Depression. We all need to stop being so high tense and live life, things are only as bad as you make them. In my opinion the Media has made things they way they are and have created many opportunities for the American people to have strong distaste for their own government. Wake up people, you live in the most wonderful country in the world in my opinion, and should be proud enough to realize it.