Thursday, January 05, 2006

Median Domestic Properity, Part II

I'm not convinced our economy is as rosy as Washington and Wall Street make it sound, and neither is Steven Pearlstein, business columnist for the Washington Post.
While the signals coming from the economic pundocracy may be solid green, the ones coming recently from the marketplace are flashing yellow. A middling Christmas season for retailers. A bicoastal housing boom that has already begun to abate, with an initial 10 to 15 percent drop in prices from speculative highs. A stock market that couldn't sustain a year-end rally despite record profits. A bond-market yield curve that makes it no more expensive to borrow money at a fixed rate for 30 years as for one year.

Other warning signs: A corporate sector unable to find a more profitable use for its record retained earnings than buying up its own stock or overpaying for questionable acquisitions. Hedge funds so flush with cash that they are lending money into a commercial real estate bubble, bidding up the price of gold and financing hostile takeovers. Pay packages for corporate executives and investment bankers up 30 percent in a year in which investors were lucky to eke out a 3 percent gain.

Pearlstein doesn't see us heading for a crackup, but his predictions don't soothe my middle-class household budget either.
A more likely scenario, it seems to me, is a 2006 in which the economic chickens finally come home to roost. Annual growth rates will fall from their current 3.7 percent to somewhere below 2 percent before the final quarter as government deficits are trimmed and households stop spending down their home equity. Inflation will reach 3.5 percent as key workers finally demand their fair share of productivity gains, health care and commodity prices continue to rise, higher energy costs work their way into the economy, and import prices spike in response to another steep drop in the value of the dollar. As economic growth slows, stocks will continue to drift sideways, snuffing out a nascent boom in corporate capital expenditures. Meanwhile, the long bull market in bonds will finally end as interest rates rise -- the result of heightened inflation expectations, continued monetary tightening by the Fed and a newfound reluctance of foreigners to invest their trade surpluses in dollar-denominated Treasury bonds.

Where is my "It's the economy, stupid" sign? The time seems right to dust it off and drag it out again.

2 comments:

mikevotes said...

That's a big question. I think it may depend on what sets of numbers you look at. Big number GDP isn't bad, but if you look at wages v inflation or unemployment, the measures for middle and lower class folks, they are horrible.

Basically, the rich are getting richer from what I can tell.

Mike

Kathy said...

Mike, the economy could work against the GOP this year like it did for HW Bush. The majority of voters are middle and lower class, which translates into a lot of unhappy voters. If people don't see their situations improving drastically by November, their votes may reflect that unhappiness.

Holding ground financially is not an improvement in most people's eyes. Too many households are just one medical emergency or layoff away from disaster.