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Tuesday, May 13, 2008

Quick and stolen

I have not felt very motivated lately to write. I have ideas, and even formulate blog posts; but it is always when I am hours away from actually being able to sit at a computer and type it out. One of the things I am really tired of hearing is the doom and gloom over our economy. Here is an analysis by a money manager from Raleigh I just read: 1.US employment: Today, our unemployment rate is roughly 5%. Last year at this time, the unemployment rate was 4.5%. Five years ago, the rate was 6%. The average rate of unemployment over the past 50 years is 5.86%. So, the rate of unemployment is higher today than a year ago, but it is by no means stark. A fair number of economists have set the “natural” rate of unemployment at about 6% to account for those people temporarily off of payrolls. Some would argue that the current trend is bad, but they typically go too far in assuming that small trends will become long-term trends. (These are the same types of forecasters who, in the 60s, projected overpopulation would cause worldwide economic calamity): 2. Disposable income: The average household income in 2006 was $48,201. In 2005, it was $46,326. Ten years ago it was $38,885. Real US disposable income has been rising nicely for over 40 years. On balance, it would be extremely difficult to contend that people have a lower standard of living today than five years ago; 3. US inflation: The current rate of inflation is 3.98%. Last year, it was 2.78%. Over the past 50 years, the average rate has been about 4.10%. While gas prices are definitely a problem in the US right now, especially for lower and middle income earners (and especially with relation to our dependence upon foreign oil), overall price inflation is acceptable and even positive. Do you remember the late ’70s? Starting in the late ’70s, Paul Volcker’s Federal Reserve made a great effort to curb the devastating effects of inflation in the United States; 4. U.S. interest rates: If you want to buy a house today, the average 30-year mortgage will cost you 5.97%. Ten years ago, the same interest rate might have been 7.13%. Thirty years ago, the rate would have been 9.2%. The “credit crunch” we are experiencing (whatever that is; I have yet to hear an acceptable or uniformly applied definition of “credit crunch”) might be noise on the screen, but people and businesses are still able to borrow cheaply, which is all that counts on an aggregate level. In order for banks to make money, they need to lend money. Let’s assume that banks want to make money. If they lend money at low rates of interest and people are buying things, this component will be fine; 5. U.S. GDP growth: In the last quarter, GDP growth was 0.6%, which, while nothing to write home about, is positive, not negative. Last year, GDP growth was 2.2%. Five years ago, it was 2.5%. The average real rate of GDP growth for the past 50 years has been 3.31%. It is clear that GDP is slipping today, which is not good at all, but real GDP growth is still positive, albeit anemic. It makes sense that, after almost 10 years of high growth, it might slow down for a short time. (Keep in mind that the average “recessionary” GDP cycle has been about 11 months, while the average expansionary cycle has been about four years I have a post or two on here about the economy as well. Actually, except for a few isolated areas and industries - our economy is still doing great. And, we are still the envy of the world. The news media has a vested interest in making things seem bad. People vote out incumbent politicians when they feel things are bad. Plus bad news makes headlines, and great sound bites. Enjoy

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