Thursday, November 13, 2008

Is the economy really is bad as they say?

In my opinion the answer is no, and yes.

Let's start with the bad. We do have a crisis in the housing industry. New home construction creates jobs, and because of poor lending practices and financial mismanagement by consumers we are seeing the prices of homes dropping dramatically. California has seen the value of residential real estate drop by a third.

This is a serious problem, and the federal government is attacking it. Foreclosures meaning that houses are less expensive to buy than they are to build. When building slows, we lose jobs.

When building slows, so do automotive sales. Three things have happened in the automotive industry that have ground auto sales to a standstill. First, the population got nervous about the economy so we are no longer willing to pay $25,000-$45,000 for a family car, even one with excellent safety features and a built-in DVD player. Another issue is that when builders are laying off they stop buying work vehicles. Some of the most consistent buyers of vehicles are small businesses in the construction industry. Finally, two factors have led us to demand more economical vehicles. Americans are "going green", at least in intention if not in practice. Second, gas prices have changed their driving habits. These two factors have led us to drive less miles and demand improved mileage from our cars. The SUV, America's best seller for the past decade, has now become the symbol of decadence and environmental abuse. Unfortunately the auto industry is playing catch up, because it takes hundreds of millions of dollars to retool factories from SUV assembly lines to sporty hybrids. Even if they spend the millions, they can't guarantee our tastes won't change.

But now, let's look at the good. Most of what we're seeing is not the result of people losing their jobs. Michigan, which is one of the hardest hit economies still only has an unemployment rate around 7%. While this is higher it's not anywhere close to the double digit unemployment we saw nationally in the 1980s. The government hasn't had to extend unemployment benefits because a majority of those filing for unemployment are able to find other work.

People are losing their homes, but it's not for lack of a full time job. People are losing their homes because they were lent more money than they could afford when they were working a full-time job and earning over time. Their spouses were working part-time jobs that now pay very little because of the cost of transportation. Utilities and food prices have gone up as a result of increased fuel costs.

People aren't starving in America, they're simply being required to be more responsible in their use of credit and realign their style of living to reflect their new personal income.

Not only haven't many people lost their jobs so far, but most are not at risk. Service workers make up 84% of employed American workers. Small companies make up the bulk of total employees. You see General Motors laying off hundreds, yet hundreds of small companies are adding one more person. Well-managed companies are taking advantage of this economy by finding talent who are willing to work.

In some industries people are being laid off, but in many other industries we are seeing more stability in employment because people are less likely to leave the job they dislike during a slow economy.

The cost of food has risen dramatically, by 50% in some communities. Much of this was blamed on increased fuel prices for agricultural and transportation machines. However, if you're prices have tapered off substantially while food prices haven't. This means that the food producers are more profitable. A huge segment of our gross national product is based on domestic and exported food. Prior to the food prices rising we were spending the lowest portion of our incomes on the food in our history. Prior to the Great Depression and the average home spent 25% of their annual income on food. That's dropped as low as 5% of our average annual income.

Food prices affect poor individuals the most, but these individuals are not being affected by the housing crisis. When housing prices drop, so do rent prices which benefits the poor.

Gasoline prices exceeded one dollar in 1974 for the first time, and remained relatively stable for more than two decades. Our total fuel expenditures grew as our cars became less efficient and our willingness to use them grew. Our usage grew rapidly and therefore are gas prices didn't need to grow. When the oil producing companies decided to start inflating prices, this was primarily designed to catch up with inflation not to gouge Americans. Additionally, Americans are no longer the largest users of oil. At one time we were able to purchase gasoline cheaper than anywhere else in the world because of the quantities we purchased. Today we have some competition with the Chinese, and rapid growth is also being seen in India.

The oil producing countries continued to raise prices until our demand for fuel slowed to match supply. The increase in fuel prices is probably more part of our natural cyclical economy than people want to admit.

Yes, our economy has some distinct challenges, but if we're able to meet our crises head-on it's my belief that the economy can stabilize as quickly as it crashed.

We're going to see benefits from this period in our economic history. I hope these benefits won't be depleted once is we are more comfortable economically.

-- I hope our national work ethic improves. Our parents and grandparents worked miserable jobs for poor pay, but that generation has created some of the strongest leaders in our history based on perseverance. This is a lesson that we could do well to learn as a nation.

-- I hope we become more personally accountable for our finances. We went from buying homes on credit, to buying cars on credit, to buying Christmas gifts on credit, to buying groceries on credit. This misuse of credit was irresponsible and is not the fault of the lending industry, although they benefited from it.

-- I hope our government trusts us to make our own decisions, but also recognizes that corporate America will take advantage when given the opportunity. We've grown past the time when our representatives work for corporate America. We need to remind our senators, members of Congress, and all our elected leaders that they work for the people. I believe many of them got the message during the last election, let's hope they continue to listen before sending us choices for the next election.

-- I think the media is starting to recognize the turmoil they create in the economy. I hope that in the future they will trend toward educating people rather than entertaining than, although our history has indicated we shouldn't expect this treatment.

-- I hope that "going green" is not a trend or a fad. I hope that Americans take it seriously because if we began, other countries will follow our lead. We have stamped a heavy footprint on the world with our 300 million people, but compared to other countries that footprint could be minor. We need to demonstrate responsibility here and hope that it's emulated elsewhere.

Our economy certainly isn't perfect. It's broken. I think, however it's not fundamentally unstable, we have simply had several manageable problems stack up at the same time. Now it's up to American business leaders, American consumers, our elected officials and opinion leaders in the media to focus on these issues before they damage the foundation of our economy.

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