Editor’s Note: Those who have been long-time readers of The Journal may remember that David Kerr at one time wrote a regular column about the economy. But he was busy with his job on Capitol Hill, and let’s face it - times were good, so writing about the economy probably was not that exciting. Well, now the economy has gotten exciting. (A little too exciting!) So we asked David to put back on his economist hat and start writing again about the topic that is on the minds of many. So here is the first of what we are sure will be several articles about the national and local economy. ~
By David S. Kerr
A recession is defined as two quarters, back to back, when the Gross Domestic Product (GDP), the wrap up of all the consumption and investment, everything that goes into our economy, contracts. So far, that hasn’t happened yet. The first quarter of 2008 showed a one percent rate of growth. This isn’t anything to get excited about, but it did surprise a number of economists, many of whom were expecting the growth rate to go negative. That, if it does happen, and it probably will, will likely come later in the year.
Americans have been through recessions before. But, what makes the current economic situation so disconcerting isn’t so much the question of whether we’re headed towards a recession or not, but rather, that several disruptions to the economy are occurring at once. Two, the mortgage crisis and the increase in oil prices, are the most dramatic.
The mortgage crisis is still playing out. Foreclosure rates have soared, large banks have taken massive write offs, housing prices are down, and the housing industry, always a powerhouse in the American economy, has slowed dramatically. Foreclosures continue, and Freddie Mac and Fannie Mae, the two government chartered companies most responsible for supplying the nation’s mortgage money (their combined portfolio is nearly $5 trillion), are in serious trouble and may shortly be coming to Uncle Sam asking for a bailout.
However, that’s just part of what’s going on.
The mortgage crisis may have a deep impact on national economic growth, and hurts several important sectors in our economy, but alone it probably wouldn’t be enough to drive us into recession. To do that, and what may tip the balance, is the impact of oil prices.
A year ago, a barrel of oil, now sized at 42 gallons, and not what many of us were taught, 55 gallons (they changed the standard several years ago), costs $70. Today that’s doubled. The price at the pump was $2.90 at this time last year, and now, at my corner Exxon is $4.04. Diesel fuel, which powers trucks and trains, critical to moving goods, is running closer to $5.00.
While Congress may be blaming this on speculation – it’s always easy to blame Wall Street and futures traders – there is a lot more going on than a little investment hedging. Unlike the 1973 or 1979 oil shortages, which occurred simply because OPEC turned off the tap, we now have a major supply and demand problem. It’s economics 101 as pundits like to say. India and China, which 30 years ago, weren’t players on the world oil market, are now buying crude oil at a tremendous rate. This increase in demand from emerging nations, along with our own insatiable appetite, is bidding up the price.
The immediate impact has been a reduction in driving, the near collapse of the SUV market, with the loss of thousand of jobs and a significant increase in the cost of the once easily affordable American aviation system. However, that’s just part of the effect. Energy prices across the board, from utilities (Dominion Power for example has been forced to significantly increase its charges) to the price of home heating oil, are up sharply.
However, what many of us don’t realize is just how much the cost of oil impacts the price of everything we consume. For example, the staple of any American kitchen, eggs, as innocuous a product as I can think of, involves significant energy costs. From the electricity used to process and package them, and don’t forget the packing material itself, to the trucks needed to haul them, there is a petroleum product is involved. The result has been a steady increase in their cost. The same is true for a host of other staples, to include bread, meats, and milk.
These two major disruptions in our once bubbling economy result in a reduction in our consumption of goods and services. When we don’t consume as much this means that sales go down, inventories increase and eventually, our economy contracts. That means the loss of income and jobs.
However, perhaps staving off this dark picture, temporarily at least, is the value of the American dollar. It’s at an all time low overseas, and while that may not be good if you’re visiting Europe, it’s great if you’re selling American goods in foreign markets. It means overseas purchasers, because of our weak dollar, can buy more American products. In other words, our goods have gotten more competitive in foreign markets and that’s keeping a lot of people here in the U.S. working.
However, while most of this isn’t that reassuring, what with several bits of bad news hitting at once, the good news is that none of this is probably fatal. The U.S. economy is massive in size and this means it can take a lot of hits. This downturn may last a bit longer, and will likely force some long term changes in our economy, but over the years we have proven to be remarkably flexible in adapting to change, developing new markets and applying new technologies. Just as we’re likely to do this time.
Now that David Kerr has told us about the economy, maybe you want to chime in about your economy. What are you doing to save money? What does the state of national economy mean for your home?
Here’s a couple of options:
1. Send us a letter to the editor.
2. Go to our website and register for our PotomacChat message board. We don’t want to chat about every topic on the world, just those of local interest, and the economy is of local interest.
3. Post a comment on this blog.
We'd like to hear from you!
Dahlgren, Va. -- Employees at the Dahlgren Navy Base and its tenant commands celebrated the 17th Annual National Ride to Work Day on July 16.
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