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Competing Forces Put the Economy in a Delicate Balance

The conventions are over but they didn’t clarify much.  President Obama argues that the economy is recovering and he is the best person to complete the job while Mr. Romney says he has the best plan to create jobs.  Exactly what either will do is a real question as secret plans abound while details are hard to find.  Meanwhile, Congress has no idea what to do about the looming fiscal cliff as the members drive toward the precipice.  Add to that a slowly developing European financial bailout plan and it is no wonder that rational business executives are hunkering down until the election is over and the New Year begins.

The economy is slowing once again as manufacturing activity has turned downward.  The Institute for Supply Management’s index of activity was negative for the third consecutive month.  While the decline is modest, that it has occurred in the one sector that had been carrying the economy is worrisome. 

We also saw a moderation in job growth as August payrolls rose a disappointing 96,000 compared to a moderate but downward revised 141,000 in July.  The drop in the unemployment rate to 8.1% was great to see but it would have been better if the labor force had increased not shrunk. 

Yet not all the reports were negative.  The spring consumer spending slump was replaced by a summer rebound as retail sales jumped in July and vehicle purchases held in.  Early signs are that the surge in household purchases continued in August.  Motor vehicles left the lot at a pace not seen in three years and that was when the “cash-for-clunkers” incentives were in place.  Chain store sales were strong as well as people bought just about everything being sold. 

On the housing front, sales are growing, construction is increasing and prices are beginning to rise across the country.  The slow but steady healing of the housing market is beginning to change gears into a stronger growth pace.  The rise in household demand indicates that people may not be nearly as worried about the future as believed. 

There was also some potential good news coming out of Europe.  While growth on the Continent continues to decline, the European Central Bank has taken a leadership role in handling the debt problems plaguing some countries and the financial system.  A rescue fund will be put in place that should stabilize conditions.  Still, the path back to solvency and strong growth in Europe will be filled with many pot holes and the process will take years to complete. 

The grid lock in Washington, however, is something that most business leaders are rightfully concerned about.  The decision to include mandatory spending cuts and tax increases in order to raise the debt ceiling was the equivalent of playing Russian roulette with a loaded pistol.  Unfortunately, many executives now appear to think that Congress might consider actually pulling the trigger.

If allowed to go through, the spending cuts and tax increases could reduce growth enough to push the economy back into recession.  That is why it is called a fiscal cliff.  Hoping that the election results will clarify the situation enough to force politicians to make the compromises needed to keep the economy from going off the cliff, though, is hardly a very good economic strategy.  Indeed, it is possible that the election results could muddy the waters further.  The likelihood is that the can will be kicked farther down the road but that does not mean needed budget deficit reduction policies will emerge at that point.  

Basically, we have two competing forces pulling the economy in opposite directions: On the positive side, consumers are spending more on both big-ticket and smaller items.  Offsetting that is the uncertainty over fiscal policy that is causing business leaders to take a wait and see attitude on hiring and investing.  When you balance the two, it looks like the modest growth rates we have seen this year will continue into 2013.

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Posted in Business Resources, Financial Education, Industry News, Mortgages and Homeownership.

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