US Economy Looking Grimmer

This journal stands by its view that there will not be a recession in the US during 2008. That is, there will not be two consecutive quarters of negative economic growth. However, what lies ahead doesn’t look like a party. Housing starts have just shown their biggest drop in 27 years; inflation has hit a 17-year high; unemployment hit a 2-year high in December; and the latest Beige Book shows the tail end of 2007 was marked by slowing growth.

Yesterday, the Commerce Department announced construction began on 1.353 million new homes and apartments last year, down 24.8% from 2006. That’s the second worst result on record, topped by a 26% drop in 1980 when interest rates were through the roof in a desperate attempt to halt stagflation. In December, construction was off 14.2%, the weakest monthly measure in 16 years. It won’t improve much either as permits for new construction dropped 8% to 1.07 million.

On the inflation front, the Labor Department said Wednesday that consumer prices rose by 4.1% in 2007 compared to a 2.5% increase in 2006. That 4.1% is the biggest increase since 1990's 6.1% rise. Much of this extra inflation is thanks in large part to oil prices that rose around 60% in 2007 and overall energy costs that rose 17.4%. Also hurting the inflation picture is the attempt to use corn to create ethanol to replace crude oil – corn that goes into gas tanks means there’s less for people and livestock. Food was up 4.9% in 2007.

Unemployment touched 5% in December, the highest it has been in two years. However, the unemployment rate is only one facet of the jobless picture. One also has to look at first time jobless claims and continuing claims for unemployment. Compared to the figures for last year at this time, initial claims are 5% higher, and continuing claims shot up 11%. While the four-week average of new claims is down 11,750 to 328,500, the persistence of continuing claims is troublesome. It means people aren’t finding work. Related to that, average weekly earnings adjusted for inflation dropped by 0.9% in 2007. People are losing ground, so they aren’t spending.

The Fed’s Beige Book report on Wednesday had a great many analysts trying to put a positive spin on it. “Economic activity increased modestly” said the Fed. “Reports from the 12 Federal Reserve districts suggest that economic activity increased modestly during the survey period of mid-November through December, but at a slower pace compared with the previous survey period.” Slow growth under these circumstances doesn’t need to hit recession levels to hurt -- a lot.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Kensington Review Home