Friday, October 31, 2008

Economy slumping...further, I mean

First, let's start with this tidbit.

In late afternoon trading, the S.&P. was 1.6 percent higher and the Dow Jones industrials average up about 130 points, or 1.5 percent. The technology-heavy Nasdaq was 1.1 percent higher.

I use this to illustrate a point. To that end, here's fact one: Most of us do not make our livings or fortunes off of the stock market, although many people's retirement funds are in 401(k)s. There are a privileged few in my income range who have anything to do with it, but by and large people earning the average American wage live of their paycheck and hope to have enough in savings to send the kids to college. Fact two is that economists say consumer spending drives about 2/3 of the GDP. That is why I consider the "real" economy that of the vast majority of us who work jobs and earn paychecks (including those many small business owners who work for a living). My point is that the system is perfectly capable of seeing stocks rise while the economy as a whole falls.

Economists said the drop in economic activity — with the gross domestic product shrinking at a 0.3 percent annual rate — presages more bad news in the months ahead. The impacts of a now-global financial crisis are continuing to squeeze companies and impede investment, causing more layoffs and austerity, while prompting Congress to consider a fresh round of spending aimed at stimulating commerce.

“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”

Of course stocks will eventually fall, but the easy lesson to learn is that if you're at the top, it's easy to say "The fundamentals of the economy are strong". And despite the fact that individuals have been suffering as their paychecks grew smaller and smaller over the past several decades, even just a few months ago President Bush was telling us everything would be fine. But that's not true.

Now that the credit bubble has popped, we are in for a giant sag. We may not be in the second Great Depression, but we are not going to return to pre-Crisis levels of consumer credit. This is a good thing in the long run, but a bad thing in the short run while we watch our businesses gasping for breath as the economy runs out of enough air to support them all.

I don't know how much clearer I could possibly need to make it, but the point is that the foundation of our strength is the average, wage-earning citizen. First and foremost we must make sure that they are secure. Wages must be strong, and things like the housing bubble must be prevented. I hope the Obama presidency will take a stronger stance on shoring up the individual over big business.

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