Wednesday, April 02, 2008

The Economic Sky Is Falling!!!

If you have been watching any sort of news the last couple of weeks, you definitely have the impression that the economy is doomed to failure and even may be entering another Great Depression. Not so fast!

Let's compare numbers of the real Great Depression and our current economy. Back then the unemployment rate was 24.9%. Today's rate is 4.8% (btw...the EU rate is 8.5%). Hardly close. By all economic measures an unemployment rate of 5% is considered full employment being actual full employment is not economically possible in a capitalistic society.

Another stat used in the above articles to show that we are nearing our doom is that food stamps are at an all time high. However, they either don't or only barely mention that

the Farm Bill of 2002 substantially expanded the food-stamp program. As the U.S. Department of Agriculture Web site notes, that legislation made legal immigrants eligible for food stamps, increased benefits for larger households, and expanded
food-stamp eligibility for people leaving the TANF (welfare) rolls. In other words, the government has made a conscious effort to expand the number of people on food stamps. Accordingly, the number of people on food stamps has expanded. And journalists are misconstruing government largess as a sign of economic distress. Source: WSJ's Best of the Web

Next is the stock market. As I've shown on here multiple times, any time there is a drop of 200 points or more, all headlines the next day are dire and dreadful. Yet, when it rises, like it did by 400 points yesterday, barely a peep. It has barely fallen 10% since the beginning of the year, which is by all estimates what is considered a correction in the market and not recession and definitely no where near great depression levels when the stock market fell 90%.

How about GDP? How is that fairing? What, it actually rose AGAIN in the latest quarter by 0.6%? During the Great Depression the GDP fell by 30%. The GDP has risen for I believe around 20 straight quarters. Hardly signs of the Great Depression. In order for us to even be in a recession GDP has to drop for two straight quarter, not RISE. Oh and incomes also rose again in February by 0.3%.

Finally we come to the housing market. This is what started the Economic Chicken Littles' proclamations. Once again compared to the Great Depression when housing foreclosure rates were 11% compared to a current rate of 2% they can hardly compare. Then when you add to the mix that that vast majority of the 2% is due to the mortgage companies trying to get creative in order to finance people who really couldn't afford it with no interest and balloons and other creative financing plans, you have even less of a comparison to the Great Depression when it was all straight mortgage products to people who at the time could afford them.

So, before you start stuffing cash in your mattress and heading for the hills, don't buy the hype, the sky is not falling. We are experiencing a slight correction, but if we stay focused and keep the policies in place that have allowed for great economic growth over the last few years like making the tax cuts permanent, we will come out of this time even stronger than before.


Emily said...

THANK YOU! I hate it when people are all 'oh no! its a recession! We're going to have another great depression.' I may have to refer a few people to this...

shannon w kirkpatrick said...

the only possible concern I have is the discussion about a major company collapsing suddenly and causing a domino effect in that industry which then proceeds to other industries, collapsing the overall market.

can you give your thoughts on that?

Cajun Tiger said...

The only market that I think that could possibly happen in the short term would be finance companies that gave all these high risk mortgages. I don't think though it would bleed out much further as it is already being corrected.

shannon w kirkpatrick said...

thanks for the info. so it sounds like we really don't have anything to worry about (at least not on the level of the Great Depression).


Anonymous said...

Wow Shane good to see you on top of things. lol. People need to realize that a 200 pt drop in the market today is no where near a 200 pt drop in the market 10 years ago when the down was at 4000. Also people need to follow the s & p 500 more than the dow. The dow only consist of the big 30 stocks. while the s & p consist of 500 stocks which is where most of our money is invested anyway.

Next thing concerning the recession. You right the definition of a recession is 2 quarters back to back of negative growth. We went from over 3 % growth to 1.8% which is definitely a slow down not a recession. Something to remember is over the last 100 years the average recession only lasted 10 months and by the time we know we are in one it is just about over.

Just remember dont hold investments today that you would not want to own in a recession. Always buy good quality investments and hold them. They always rebound. Stocks have always out performed fixed income just not everyday.

Dee said...

A guy called into Rush yesterday saying that Rush isn't telling people the truth about the economy. He then went on to pain this doomsday picture about how things are soon going to be the likes of the World War I era. I just love Eeyores!!