Revision and more thoughts on the economy

It was only eight days ago that I posted a comment about the economy. In those eight days, worldwide financial and economic news was so bad, with massive employee layoffs, terrible earnings reports and steep stock market declines that, in my opinion, the comments in that post proved wrong. If there was an ethical way to remove those comments from the Internet, I would.

The better action, though, is to acknowledge an overreaction to the short-term developments that led to the opinion expressed. Following is a revised opinion.

Credit will slowly loosen making borrowing at all levels somewhat easier. The change will not be as fast as the Treasury and the Federal Reserve would like, but credit will slowly loosen. The Federal Reserve has started lending against commercial paper from banks and corporations, and some of the $250 billion used to capitalize banks by buying stock is deployed. Banks are slowly beginning to trust other banks – interbank loans are slowly rising. Yesterday’s news showed a rise in the rate of new home purchases, probably because cash rich buyers (there are some out there) see housing prices near the bottom of their decline. New home construction will not pick up for some time though because the inventory of unsold new homes is still high.

The Conference Board's index of consumer confidence index was just published. At 38.0, down from last month's 61.4, it is dismal. Consumer spending already is down. As consumer confidence declines, so does consumer spending. The present level of the index points to an extremely weak retail season. If gains in the stock market - up some 400 points today - continue, and gasoline prices stay down, confidence and spending will slowly return

Small business owners – hunker down. Reduce expenses as much as possible, and increase revenue if possible. Depending on the business, most of you can survive unless you are heavily in debt. If heavily in debt, have a contingency plan in mind or on paper so that if your line of credit is reduced or canceled you have a plan of action ready to go. Many options exist – take off the blinders and look at all.

I do not believe the US will suffer either the depth or the length of the worldwide recession that is at hand. However, it will be at least a year, and perhaps two years, before an upturn in the economy show up. Worldwide it will be deeper and longer.

In this country, we will have dodged a bullet. Barely.