Thursday, January 08, 2009

Horrible Economic News vs Reality

There are many predictions of gloom and doom, these days. I see the situation as less dire than many people do.

The increased number of failing businesses that we have seen, and that have people spooked, is a by-product of the financial crisis, where businesses that were in trouble have been pushed over the brink they were headed for, anyway; they just got there sooner. And when all of that gets compressed into a shorter-than-normal time frame, things do appear to be falling apart.

Left alone, the marketplace rids itself of weak businesses routinely. Our marketplace has been anything but "left alone," however, and some of the tinkering with market components has allowed weak businesses to survive beyond their normal life. All that tinkering was a substantial cause of the mortgage meltdown, and also contributed to the Big Three crisis.

But getting the weak players out of the game, despite the pain it inflicts temporarily, is a good thing that will eventually make the remaining players stronger. We may see more failures of border-line businesses, but stable companies should not be significantly weakened by the general slowdown.

But what must not be lost in this discussion is that even in these troubled times some companies in most segments of the economy are doing well. Even in the auto industry the transplant foreign car makers are doing okay, and among the Big Three, Ford stands out from the others.

We hear all the bad news about unemployment, but unemployment is still less than seven percent, and that isn't especially high. Officially, full employment is when 94 to 96 percent of the people wanting a job have a job, and we are not far off that statistic right now. Even when you consider that some people get discouraged and quit looking for work and are thus not counted in the ranks of the unemployed, unemployment is not at crisis levels, or even close to that, at this point. Further, the unemployment number reported is “net jobs lost.” That doesn’t mean that no new jobs are being created, only that there are more jobs lost than created. So, there are isolate areas of business success nestled among the bad news.

And, even in the worst of times somebody’s going to make money, so there is an advantage to those people to scaring people. For example, one guy used the opportunity to give away a book telling people how to survive the depression of 2009 in order to increase the subscriptions to his magazine.

And don’t forget that the media has its own selfish reasons for reporting horrible news.

The role of politics in all of this can’t be ignored, either. An Observations prediction: Economic news will improve beginning on January 21.

The stock market usually predicts the broader economic condition six to nine months down the road. The market seems to have stabilized, which doesn’t rule out another decline, but most of those in the know believe that the market has bottomed, or is near the bottom, and that indicates that the economy will stabilize over the next several months.

The message to take away from this is: don’t freak out. Be prudent. Handle your money sensibly. Things will improve.

Cross-posted on Faultline USA

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