NEW YORK – More headlines every day: Soft new- and existing-home sales, worst home-price decline in 16 years, foreclosures, credit jitters, calls for government bailouts and lower interest rates, real estate and corporate assets in the dumps, the poor getting poorer and the middle class struggling with rising mortgage payments.
If you landed from another planet and picked up a newspaper, you'd think we're on the brink of another Great Depression. Or at least a long, slow 1970s-style gloom and doom.
Maybe so, but probably not. As a member of the "Millionaire Zone," I can't ignore the bad news and there's been plenty of it lately. I'm not an economist, but I know that when the housing inventory reaches almost 10 months of supply, that's a lot of homes for sale, and the underlying reasons — speculation, overextended credit, people over their heads — clearly aren't good signs.
For those dependent on the housing or construction industries, it's definitely bad news.
But I'm always a little bit of an optimist. The U.S. is still a model of economic strength, and I try not to forget that. Sure, not all is perfect. But there must be some good news to go with the bad and the ugly, right?
While it's too soon to tell whether things will get worse, it turns out that if you watch the papers and government statistics plenty is going right — believe it or not.
And now for the good news
The good stuff isn't getting much attention in the press. Reading the papers gives an overview of key economic stats, but more detail is available from the various releases of the U.S. Department of Commerce, Bureau of Economic Analysis, or BEA.
Here are five good-news stories:
1. Jobs and incomes. Although the economy did shed 4,000 jobs in August, the first decline in the job numbers in four years, unemployment remains near a five-year low. I don't always believe unemployment figures because the numerator — people actually looking for jobs — is hard to track. But at the moment it looks like most of the damage is limited to real-estate related job declines in construction and financial services. Income statistics here are more solid. Obviously tied to jobs, incomes continue to march forward (although reportedly more among the wealthy than the middle class), with disposable personal income up some 0.5% in July after languishing in the red in April and May. Year to year, disposable income is up 3.8%, while personal consumption expenditures are up only 2.5%.
2. Savings. With incomes up and consumption up too, but more slowly, that means more savings. July came in at 0.7% of income, the highest figure for 2007 after going negative earlier in the year.
3. Inflation. Inflationary signals have been erratic; some months have reported large increases in certain types of goods and services — energy, food, etc. July was much tamer, with a soft 0.1% increase pretty much across the board, with a 0.1% decline in durable goods prices. I'm still concerned about food prices, but it really seems that, if anything, some of the credit problems, plus reasonably good news on the energy front, is keeping the inflation tiger in check for now.
4. Exports and trade deficit. Here's one of the brightest of the silver linings. While the real-estate-related sectors go through their funk, exports have boomed — up some 11.9% since last year (based on a 3-month moving average). Imports are up only 3.8% in that period, so the deficit, which exceeded $60 billion in each of the first seven months of 2006, has only done so one month in seven this year. Upshot: we've become much more of an export economy. That's a very good thing for businesses (especially multinational) and long-term employment.
5. Construction spending. While builders and building materials firms are taking it in the chin, the good news is that construction spending growth went negative four months ago. The adjustment is already being made. Builders have already cut back, financers are going through it right now. It's better for the economy to adjust quickly. If more painful in the short term, the eventual outcome is better. Nonresidential construction has been up, rising 0.4% in July.
And that's not all
I see decreases in some borrowing rates. Shorter-term, conventional mortgages and auto loans are cheaper. Interest rates for higher-risk investments are starting to reflect the risk, which will bring more efficient capital allocation. And although the stock markets have been volatile, historic price-to-earnings ratios are fairly low and are steadier than in years past — meaning businesses are learning to deal better with economic cycles.
Early 20th century economist and business-cycle expert George Schumpeter said it's best to let the "winds of creative destruction blow freely" to reallocate capital and economic resources where they should go.
So while we may worry about the housing industry, it's better to let those winds blow freely to get back to normal as soon as possible. Sure, there's a risk that things will get worse before they get better — in fact, I think they probably will.
But just because the wind is blowing doesn't mean it's time to head for the storm cellar.
Copyright (c) 2007 MarketWatch, Inc.