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The Key to Economic Recovery? Overcoming Fear

Maybe fear is not the only thing we have to fear, but it is the key problem facing the economy.

The drum beat of negative economic news is dominating the information networks:  The economy isn’t creating any new jobs.  Inflation is picking up.  The government isn’t able to find a solution.  The stock market is an out-of-control roller coaster.  What is an average person to do?  Well, it looks like hunkering down is back – and that is the biggest threat to the recovery.

August was a crazy month, and so far September has not been much better.  It started off with a disturbing employment report.  For the first time since the end of World War II, precisely zero jobs were created.  Yes, the labor market flatlined in August, causing the unemployment rate to remain at a way-too-high 9.1%.

The report’s details were as distressing as the headlines.  Of note was weakness in both hours worked and wages.  You can make more money by either working longer or getting higher pay.  Unfortunately, both fell, and that points to weak income growth.  Without more income, consumer demand is not likely to expand a whole lot.

Compounding the stagnant wage problem was accelerating inflation.  In August, consumer prices rose solidly, led by sharp gains in food and energy.  Unfortunately, the increase in retail costs also was also seen in most other categories.  There were jumps in clothing and used vehicles as well as moderate rises in the costs of medical care, housing, education and personal care products.  Over the year, consumer prices rose nearly 4%, significantly faster than wages and salaries.  The result: household spending power is being eroded.

Are you depressed yet?  No?  OK, take the stock markets – please!  The equity losses over the past two months erased all the gains made this year.  Declining stock values affect people’s perceptions of their well being, and confidence has been hit hard.  The Thomson Reuters/University of Michigan’s measure of consumer expectations hit its lowest level in over 30 years.  To top things off, we had an earthquake and a hurricane flooded out large parts of the Northeast.

So, the question is once again, is a double-dip recession inevitable?  And once again, my answer is no.  Consider some of the other less popular numbers.  For the second consecutive month, manufacturing production soared.  The improvement was widespread, with huge increases posted in the computer and electronics, electrical equipment and appliances, motor vehicles, aerospace, primary metals, furniture and petroleum industries.

A second heartening report was the Institute for Supply Management’s survey of the service sector, which actually accelerated in August. Given the chaos during the month, that is amazing.  Also, motor vehicle sales held up.  Yes, they eased a touch, but there were fears people would stop buying big-ticket items.  Apparently they haven’t and if the chain store sales are any indication, households also bought a lot of soft goods as well.

The data are much more mixed than the news.  The economy is not in good shape, but when I see that big-ticket consumer, high tech and capital goods output is on the rise, households are still visiting chain stores, and the services sector is accelerating, I have a hard time believing the economy is going down the drain.

Growth will likely remain sluggish, but there is one thing that can turn things around: improving confidence that leads to increased consumer spending.  The Fed and Washington can do only so much.  If we stop asking what the government can do to create jobs and start visiting the malls again, that would turn things around really quickly.

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Posted in Industry News.

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