Economic Slowdown?

The drastic fall on Wall Street yesterday might well be an over-reaction to bad consumer spending reports from the weekend [traditionally the strongest sales period of the year]; but today’s reports on manufactured goods and housing suggest that something more is afoot. Here’s the news from the New York Times: Orders for Manufactured Goods Plunge

My instinct is to wait and see whether the next month or two is as bad. If they are then the prospects for a full bore recession in 2007 grow larger. Already the housing sector is a mess. Home prices are falling and eliminating the “feel good” element from consumers: for years now we have relied upon house price inflation rather than wages as the source of increased consumer spending. Take away price inflation and we would be left with wage increases as the primary source of growth next year. Since such increases have been very poor throughout this cycle, and show little sign of accelerating, the outlook immediately dims.

The economy has been extraordinarily badly managed for years. Growth has been Ok, but not great, and what growth there has been has only benefited a very narrow band of consumers [the super-rich], tax policy abetted this trend but was also supposed to provide sufficient stimulus that the majority of consumers also saw conditions improve. This never happened. Instead, despite strong gains in productivity, wages lagged as companies were forced to spend more of their compensation dollars on health care rather than on cash wages. So America’s failure to deal with its health care crisis is now causing broader economic damage: companies are using rising health care costs as an excuse to avoid wage increases [total compensation, which includes health care benefits, have risen fairly well] thus reducing the spending power of the majority of consumers. Plus the tax cuts created a hole in the Federal budget so there is little room for further cuts to stimulate demand. Interest rates have risen in the past year as the Federal Reserve Board clamped down on inflation, but even now they are not high and any reduction would compound the dollar’s plight [and thus potentially ‘import’ inflation]. The reult is that our policy hands are tied right when we need some flexibility. Whoops!

As the saying goes: “This a right old mess you’ve gotten me into!” Let’s hope the downward slope is not too steep and that 2007 turns out merely to be poor intead of awful.