Tuesday, April 14, 2009

Are Positive Economic Signs Helping Ordinary Americans?

While some people point to Wells Fargo's surprisingly healthy first quarter last week (Noriel Roubini said in Time magazine last month that Wells Fargo was one of the weaker banks; what happened?) as proof the recession has bottomed out, unemployment is still 8.5 percent and likely rising. A chipper AP story reports that the first week of April had the lowest amount of new jobless claims in months. One good week in the middle of 40 may not be a great indicator, and its impact on the unemployed remains to be seen. This New York Times piece speculates that the strong Dow could be covering up significant problems in the overall economy.

This blog has quoted economist and frequent Commonwealth Club speaker Robert Reich on numerous occasions, but he, along with Paul Krugman, have consistently spoken with clarity and caution regarding the state of the economy. In a Salon article Monday, Reich again tempered the media's newfound bullishness and believes the economic perkiness is due to the massive cash infusion issued by the Treasury.

But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortgage rates are declining, mortgage originations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.

The inclusion of the theory that the recent bump in the Dow is due to the printing of new money was non-existent in most news coverage. Instead, the message in nearly every major story last week, save for a very cautiously optimistic article in the Boston Globe Friday, is that the financial sector is doing well and could indirectly help the pocketbooks of struggling Americans. It's true that short- and long-term interest rates are unbelievably low, but will it translate into more construction of homes? The inventory of already built new homes is high, and recently foreclosed homes are even higher. This could be where Wells Fargo's announced $190 billion in new loan applications are emanating. Once the glut of inventory begins to deplete in relation to low interest rates, where will this segment of the economy look like?

The attitude of much of Wall Street is to keep things positive; to keep the wheels of finance rolling. But it's likely that more than a half million additional workers will get a pink slip this month. Add to this the previous 5 million, and you have quite a segment of the population scrimping and saving and not purchasing goods and services. Until Americans see their own personal economies picking up, the overall mental health of the economy will not be viewed as looking as rosy as recent news reports might be leading people to believe.

--Steven Tavares


Post a Comment

Thank you for visiting us. Please post your message. We ask that all comments be considerate of the many viewpoints and backgrounds of our other readers.