Seeking a Shallow Bottom: The U.S. Economy Going into the Second Half of 2008

Has the U.S. economy touched bottom in this economic downturn yet? Or is there further to fall? Let’s look at the numbers and see if there’s a possible ray of hope beneath the data’s bleakness.

The latest figures for industrial production in the U.S., those for the month of April (May’s figures are being compiled by the Federal Reserve as of June 15), showed a 0.7% decline following a 0.2% rise in March. Most of these losses were in the automotive industry where manufacturers are dropping gas-guzzling SUVs from production lines that have been hit with strikes and strike-related parts shortages since February. There was also a large drop in construction supplies, also no surprise with residential real estate in a funk. However, mining, materials and business equipment all posted reasonable to sizeable gains when compared to production levels in April 2007, the first ray of hope.

Unemployment as calculated by the U.S. Department of Labor climbed to 5.5% in May from 5.0% in April, mostly due to job losses in construction, manufacturing, professional and business services and retail stores. The only bright spot here seems to be the healthcare industry, which added 34,000 jobs in May 2008 and 383,000 jobs since May 2007. These are not encouraging figures, although there is a possibility they’re slightly skewed (by 0.2%) by job-seeking recent college grads and high schoolers out for the summer.

Retail sales for May surged 1% over those in April quite possibly as a result of tax rebate checks suddenly appearing in everybody’s mailboxes. This is much higher than anticipated and will contribute substantially to future economic growth figures.

Soaring Prices Translate to…Meager Growth?

Inflation pressures are climbing in the U.S. and the rest of the world due to skyrocketing commodities prices. The most recent report from the Labor Department indicates that consumer prices rose 0.6% in May and are 4.2% higher than they were in May of last year, meaning that currently prices are rising faster than real income which measured only a 0.2% rise in April 2008. Leading the pack, of course, are surging energy costs, up 4.4% in the month of May and up 16.5% in the first five months of 2008.

The mother of all economic indicators, the one that matters the most, is the gross domestic product or GDP which measures how much larger or smaller the entire U.S. economy is as compared to the previous month, quarter or year. Early estimates of U.S. GDP growth for the first quarter of 2008 measured 0.6%, but as additional data came in, that figure was revised upward to 0.9%. As quarterly growth goes, that’s a pretty measly figure, but the fact remains that it’s a positive number, not a negative one which would indicate a recessionary contraction.

The Only Thing That’s Falling

Everyone’s biggest economic concern in the U.S. in 2008 must be the housing market which is seeing double-digit declines in home values in some regions of the country. However, the operative phrase there is “some regions” because, according to the Office of Federal Housing Enterprise Oversight, the double-digit losses are only in California and Nevada while housing devaluation over the previous twelve months is limited to 14 states and the District of Columbia which were substantially overpriced in a “bubble” that did not reflect the true value of houses in the area. (Read the news release here.)

Housing prices in some of these regions, including parts of the northeastern states and the industrial northern midwest, are also being affected by shifting demographics as more people are moving out of these areas than are moving into them, leaving an inventory of unsold and devaluing houses behind. (See “Do U.S. Economic Indicators Still Reflect Reality?” for specifics.)

So what’s next for the U.S. economy?

A recent conservative forecast by Wachovia Bank, which has a fairly good track record at this, shows the economic stimulus from the tax rebates boosting retail spending through the end of September 2008 before finally petering out. Although sections of the housing market are predicted to continue declining throughout the remainder of 2008 if not longer and unemployment may rise briefly above 6.0%, both the price of crude oil and consumer inflation are forecast to also diminish through roughly the same time frame. All in all, in only one quarter, the fourth quarter of 2008, is the economy predicted to actually contract, making this a shallow downturn indeed and 2009 a new and hopeful year for economic recovery.

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