How Bad Can it Get?
How Bad Can it Get?
My last blog on the economy was entitled: It’s Worse Than We Think. So what comes after, worse than we think? Worser is not a word, but it’s what comes to mind today when I see the latest employment and price data.
The worser news began yesterday with the release of the Consumer Price Index information. In October, the CPI actually fell 1%. This news might be ignored by some, but to me it raised a red flag of the highest intensity. A drop in the general price level is quite different from a drop in the price of one or two things. We can understand specific price drops in, say, housing, because there was a huge real estate bubble that was years in the making. That is not deflation—it is a price adjustment to an oversupply. But, when all (or the average of all) prices drop, that is not something we can ignore. Price deflation is a danger sign for the economy that would be akin to a bad EKG for someone who had no history of heart trouble. The attending physician would know that something was seriously wrong. A falling CPI is for the economy what a bad EKG is for an individual.
Then the news this morning came:
- The U.S. Department of Labor reported that initial filings for state jobless benefits increased by 27,000 to 542,000 for the week ended Nov. 15. This marks the third time since 1992 that initial claims have exceeded 500,000. Claims are at the highest total since the week ended July 25, 1992, when 564,000 initial claims were filed.
- The number of people continuing to collect benefits for one week or more neared a 26-year high. The number surged by 109,000 to 4,012,000 for the week ended Nov. 8, the most recent data available. The last time the figure was this high was for the week of Dec. 12, 1982, when it reached 4,381,000.
- This means that last month’s unemployment rate of 6.5%, a 14-year high, will most likely jump at the end of November.
- The Conference Board’s index of leading economic indicators declined 0.8 percent, and a measure of manufacturing in the Philadelphia region fell to an 18-year low. The index is also made up of jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times, new orders for consumer goods, bookings for capital goods and money supply adjusted for inflation.
· A report from the New York Times about imported automobiles pilling up in the parking lots of the Port of Long Beach: “. . .for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril. “This is one way to look at the economy,” Art Wong, a spokesman for the port, said of the cars. “And it scares you to death.”
I’m scared. The economy is in a serious nosedive, and we are not alone. You can repeat these kinds of statistics in Germany, the U.K., Central Europe, Russia, South Korea, Argentina, Vietnam and almost all of Southeast Asia. There is a world-wide slow down that has serious spiral-down consequences. The United States is not an economic island. We are connected with everyone else in the world. What we do affects them; what they do affects us. We are in an embrace that is not quickly loosened, and we are all falling off the same cliff.
My fear is that unemployment may reach past the forecast level of 7% to 8% that the Federal Reserve is predicting. My fear is that it can go to 10% or higher. If it does, then deflation is a serious consequence. With that many people out of work, the personal income level in the United States will plummet. Couple this with the tendency of out of work people to seriously curtail not only their own spending but also to influence others to do the same. When you see your neighbors lose their jobs, your immediate concern is for yours. Declining consumer spending is not what we need right now, but it looks as if it may be what we get.
The only thing we can do, as citizens, for now, is to hunker down and prepare for the worst. For investors, if a period of deflation does persist, you want to be a net creditor, not debtor. In other words, pay off your own debt, don’t take on any more, and buy bonds, CDs and other secured debt obligations. Holding sound debt in a period of falling prices is the best of all worlds. You are paid a fixed rate of interest, which means a constant stream of income in a world where every month that same income stream buys more than it did in the last.
We should not expect a period of deflation to last for a long time. Deflation can be defeated by boosting the money supply. But, we have already been priming that pump for almost a decade, so I am not certain of what the effects will be if we continue. A liquidity trap, postulated by the late economist, John Maynard Keynes, may come into play and limit the effectiveness of any monetary policy.
Even then, however, fiscal stimulus will have an effect. The United States has decades of bridges and roads that have been neglected. A huge federal spending program on these kinds of needed projects would go a long way to pumping money into the system, employing many of those who are unemployed, and leading the way out of deflation and a serious recession. I suspect a major stimulus bill will be introduced when the new Congress meets next year.
So, how bad is it. It is so bad that this morning President Bush put out a press release saying he was dropping his opposition to extending unemployment benefits past the 13-week limit now imposed. He opposed this suggestion in September. Now he supports it. When a Republican President does a 180° turn on a labor benefit issue, you know it’s bad.
Mr. Obama’s Weekly address on video, announcing his new stimulus plan:
http://www.youtube.com/watch?v=m17pz0R_qZo
For an up-date as to how bad can it get, see: 34 Year High
