Threats To US Economy Fading As Fall Begins

While there are still “experts” and economists that are predicting a double dip recession and much more pain to come for American families, the data that we have seen over the past 2 weeks says that two of the biggest threats to the economy are fading as summer ends and fall begins. If you had polled economists and financial professionals 2 months ago a significant number of them would have said that it was likely that another round of mass layoffs was coming and that the Fed’s monetary policy was going to lead to deflation in the near future. Luckily for us and our bank accounts, neither one of these seems to be imminent or possible in the near future.

After seeing a spike to nearly 500,000 new unemployment claims per week in August we have seen a gradual reduction over the past month to a two month low of 450,000 last week. If this trend continues we should see these claims fall below the all important 400,000 mark within the next 6 months. In fact, claims have dropped by 11% in just the last month. 400,000 new claims is a key number because anything below this indicates that the economy is growing fast enough to lower the unemployment rate whereas anything over 400,000 claims indicates that employers are still not hiring enough new employees to offset those being laid off and new workers entering the labor pool. So what was the meaning behind the spike in August in unemployment claims? Experts believe it could be a variety of factors including seasonal labor factors (certain industries shed jobs in the summer) and the termination of thousands of temporary census workers as the Census Operation wound down. Until we see otherwise, expect the labor market to stabilize and grow moderately over the next 3-6 months.

The 2nd fear and one that could have had dramatic consequences for the USA was deflation, something not seen since the 1930’s. While this topic is thoroughly studied by economists and is given a lot of attention the fact that it has not occurred in over 70 years indicates that the chances of this ever happening is slim even in the worst of times. The lax monetary policy that has led to record low interest rates to spur lending has not had the effects that were hoped for. Lending to small business and homeowners remains extremely tight even though banks and other lenders have access to extremely cheap money. While cheap money and the printing of billions of dollars to support government spending generally leads to inflation, consumer prices had dropped for 3 consecutive months in the early summer as home prices continued to fall, wages stagnated, and the job market situation made demand for consumer goods extremely weak and unreliable. However, the latest reports indicate that consume prices rose .4% in August and .2% in July. Not only does this show that deflation is not on the horizons but it also indicates that the Fed’s policies have kept inflation in check so far. While the current monetary and fiscal policies will lead to inflation eventually if not altered, the fact that it remains in check at the moment is good news not only for the economy as a whole but families in particular. Rampant inflation during this tough economy would lead to ever increasing prices on consumer goods, food, and gasoline which would put an even bigger strain on household budgets. Keep an eye on this number in the future as no one really knows where it is heading.

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