I have been watching the unfolding events in the economy and have formed an opinion on what to expect. Here’s the way I see it.
With the reduction in the discount rate last week and now the federal funds rate today, interest rates are down to 2005 levels. These moves by the Fed are meant to slow and then stop the recession we have fallen into. Slight additional rate cuts are possible too, even though there is not much room left in the rates.
Unfortunately, with the Fed pumping so much money into the system through the discount window, and our interest rates so low, the dollar will continue to decline in value over the next few months. (Of course, interventions by foreign banks may change this.) This means for us, higher fuel costs and a higher rate of inflation. Because of the high fuel costs, I believe this recession will be a steep one, and a long one. I hope I am wrong.
With cheap dollars US exports will increase because our goods are more competitive worldwide. That is good but the main driver of our economy is consumer spending (almost 70% of total GDP.) Because of high fuel costs, consumer spending will not rebound any time soon, no matter how low interest rates are. So the main driver of the economy will be weak, and the recession will continue. It is a vicious cycle, more interest rate cuts will drive the dollar down even further, fuel will become even more expensive, and consumer spending will not grow.
I believe we are in a bind and I don’t see a way out of it. You may have a different take on the situation – post a comment to let us know what your crystal ball says.
Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.
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2 comments:
Although everyone seems to think we are in a recession, the data don't yet support that conclusion. I just heard this morning that the data indicates continued slow growth, so are we going to let the media is going to hype us into a recession?
My business' orders don't indicate a recession. We currently have a record high backlog.
I hope you are right and a recession does not materialize. I read the signs differently though, and think our economy is shrinking. The main driver for my thinking is the low value of the dollar that leads to the high cost of fuel that, in turn, is reducing discretionary spending. Non essential industries, for example sporting and camping goods, are seeing lower same store sales when compared to last year. I beleive the same is happening in department stores and discounters. The great engine of our economy is consumer spending is slowing.
As to the role of the media, it seems to inflame and accelerate what has started. Still though, the true culprit is the weak dollar.
Thanks for your comment.
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