The Economy: Why It’s Worse Than You Think

Why It’s Worse Than You Think

For months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half. They're dead wrong.

By Daniel Gross | NEWSWEEK
Jun 16, 2008 Issue


The forgettable first half of 2008 is stumbling to a close. On Friday, the Labor Department reported that American employers axed 49,000 jobs in May, the fifth straight month of job losses—an event that signals a recession sure as the glittery ball dropping on Times Square augurs a New Year. The report, which inspired a 394-point decline in the Dow Jones Industrial Average Friday, was the latest in a run of bad news. Auto sales, the largest retailing sector in the U.S., were off 10.7 percent in May from the year before. And housing? Ugh. Nationwide, according to the Case-Shiller Index, home prices in the first quarter fell 14 percent.

Yet hope springs eternal that the second half will be better than the first. Economists polled by the Federal Reserve Bank of Philadelphia in May believe the economy will grow at an annual rate of 1.7 percent and 1.8 percent in the third and fourth quarters, respectively. Lawrence Yun, chief economist at the National Association of Realtors, tells NEWSWEEK that "home sales and prices in most of the country will improve during the second half of 2008." (Yun is the Little Orphan Annie of forecasters. He's always sure the sun will come out tomorrow.) Last month, Treasury Secretary Henry Paulson said, "We expect to see a faster pace of economic growth before the end of the year."

The cause for optimism: the U.S. has called in the economic cavalry, which has responded in textbook fashion. The Federal Reserve has aggressively cut interest rates, bringing the Federal Funds rate down from 5.25 percent last September to 2 percent. Earlier this spring, Congress and President Bush, in a rare moment of bipartisan accord, passed a stimulus package, which will shove nearly $100 billion into the pockets of American consumers by mid-July.

But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.

As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low.

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http://www.newsweek.com/id/140553

I've been checking my daily paper the past few months to see what their "prognosis" is.
Day after day, week after week, the pundits seem overly optimistic about the "recovery" which they are expecting at the end of the year. Most seem unanimous that,
a) the worst is over,
b) housing has hit its bottom
c) recovery should start at the end of the year, showing about a 1.6% gain.

ALL of these assumptions are false.
I think the people who make these statements, it's really just wishful thinking + delusion. They think that if they say it often enough, it really will come true.
Meanwhile, the economy is slowly seizing up, like an engine without enough oil.

Look at who the biggest advertisers are in your local media. If it's like most markets, it's real estate, cars and retail merchants. Since they're paying the bills, these advertisers demand and get stories that are intended to drive up their business, not inform with facts.

The housing market will continue to correct for at least two more years, likely a few years longer. Many people have been financing their day-to-day living as well as the purchase of everything from the new SUV to granite counter tops with home-equity credit lines which have now been pretty much shut off since their equity has vanished. Also, we have no manufacturing base anymore. The US makes virtually nothing that the rest of the world wants to buy. We import everything and pay for it with a dollar that's worth half what it was when bush was installed.

Anyway, these "polyannas" that "predict a better second half of 2008" are just doing more of the same -- "catapulting the propaganda" to trick people.

In oil, food, steel.

75% of the world's copper comes from a few isolated mines...

...has only benefited speculators and hedge fund investors, none of this has gone to the creation of jobs and real long term economic stimulus programs. In fact everything the Fed has down has contributed almost zero to rebuilding the U.S. economy, thus no economic stimulus, no recovery