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Missing Link for Economic Recovery? Confidence

Franklin Roosevelt became president during one of the worst economic times in the history of the nation.  While he knew that the fundamentals of the economy were terrible, he felt it necessary to focus on something that was more emotional in nature: fear.  His famous statement, “let me assert my firm belief that the only thing we have to fear is fear itself … which paralyzes needed efforts to convert retreat into advance” is true in lots of ways right now.  The biggest problem facing the economy right now is a lack of confidence driven by a fear of the future.  Until the outlook of business leaders and households improves, the economy will continue to grow sluggishly.

First, let’s make it clear we are not in a recession and it is not likely we will go back into one.  Still, that does not mean the economy is in good shape.  For the third consecutive month, job gains were disappointing.  The 80,000 June payroll increase means the average for the spring was a meager 75,000, not enough to lower the unemployment rate, which stayed at 8.2%.

The details of the report were as bad as the headline number.  Temporary help made up nearly one-third of the total increase while the normal job creating industries did little.  Health care firms added fewer workers than usual and retailers, transit and information firms all posted cutbacks.  The government sliced and diced as the spending cuts in education took a major toll on school employment.  At least longer hours and rising wages bode well for wages and salaries.

While the politicians all say it is about jobs, the strength or weakness of the labor market is a reflection of the underlying fundamentals that drive the economy.  That is, in the which-comes-first question, you need spending  to drive hiring which then creates more income, allowing confidence and consumption to rise even further.  Indeed, what would really break the negative cycle is a boost to confidence.  Without a positive outlook for the future, consumer spending will be limited and businesses will hire cautiously.

Driving the lack of confidence is a group of factors that have overwhelmed the economy.  The first hit to optimism came with the surge in gasoline prices.  That not only reduced household spendable income but it created a “here we go again” attitude that battered consumer confidence.  On the heels of the gasoline price surge came the near meltdown of Europe.  Fears that the Continent’s problem would lead to a major financial crisis reached their peak in June and business optimism cratered.  Weakening economic activity in China only added to concerns that the world economy was in trouble.

With consumers becoming cautious and businesses hunkering down, it should not have surprised anyone that job creation slowed.  This reinforces the view that before growth can improve, confidence has to rise.  So, what would cause that to happen?  Clearly, something good coming out of Washington would help, but that is doubtful.  With the election still four months away, a lot more damage could be done in that time.

On the positive side, the recent agreements in Europe seem to indicate the problems have been kicked well down the road and that a major calamity has been avoided, for now.  That should ease some of the fears that have gripped corporate leaders, especially those with major European businesses.  However, the agreements don’t mean European economic activity will accelerate; they only suggest a major recession on the Continent is less likely.

So, where do we stand right now?   There is little on the horizon to indicate the economy will surge anytime soon.  The Federal Reserve has few bullets left, fiscal policy is in gridlock and the rest of the world is hurting.  While improving conditions in the housing market and falling gasoline prices should help keep the economy moving forward, strong growth is not likely to appear before the end of the year.

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Posted in Business Resources, Financial Education, Industry News.

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