http://durangoherald.com/asp-bin/article_generation.asp?article_type=biz&article_path=/business/08/biz080702_1.htm
July 2, 2008
I am beginning to feel a bit like a stuck record. The national, state
and local economies are feeling the impact of a near "perfect storm"
in the aftermath of the subprime meltdown.
On the Net
More information will be available at soba.fortlewis.edu/econoweb on
Friday.
Rising inflation and unemployment (though still pretty low), rapid
increases in the price of food and energy, declining home values and
the credit crunch are all contributing to a sense of foreboding.
The University of Michigan Consumer Sentiment index is the lowest it's
been since June 1980. At that time, the unemployment rate was 6.3
percent and climbing - it peaked at 11 percent two years later - and
inflation was just less than 15 percent.
The Schiller index of U.S. housing values in May fell 16 percent from
a year ago - the most precipitous drop since the introduction of the
index. The index for Denver fell by about 5 percent, quite tame by
comparison, but this is a secondary effect as housing prices in Denver
have been flat since the recession a few years ago.
Labor market and inflation
The most recent figures show that the national unemployment rate is a
respectable 5.5 percent, low by historic standards, while inflation is
starting to creep up, to about 4.2 percent, though core inflation is
still a moderate 2.3 percent.
Of the most visible inflation rates, food prices have risen by 5
percent, household energy 11.9 percent and motor fuel 21 percent. And
with oil prices still rising, fuel prices can be expected to only
rise.
Couple poor agricultural production now and for the foreseeable future
(flooding in the Midwest, drought in Australia, typhoon in Burma) with
increased demand and there will be considerable price pressure on food
prices as well.
In the Four Corners, the confluence of this conspires for even higher
prices here. Given the remoteness of the area, rising trans****tation
and food costs will drive prices of these goods higher than in less-
isolated areas.
Housing sector
The Fed has been lowering the federal funds rate and offering banks
and other financial institutions low-rate loans to increase liquidity
in these markets. The desired effect is what economists call the
"monetary transmission mechanism" - more money affects the real
economy.
However, over the last five to six years, lower rates for banks have
not been passed on to household consumers. The 30-year mortgage rate
has become more or less fixed since 2000 at about 6 percent, while the
Fed funds rate as vacillated between 1 percent and 6.5 percent over
the same period. Either we are in a "liquidity trap" or lenders are
demanding a far higher risk premium on consumer loans.
The effects of the tax refund will most likely be small and short-
lived. Many are using their refund to pay down debt and increase their
savings - in May the personal savings rate shot 5 percent up from 0.4
percent in April, the highest since 1992.
All Durango Area Real Estate Listings
Tourism and housing
All of this news does not, I'm afraid, bode well for tourism and
construction - the area's largest sectors in terms of percent of total
income. Higher fuel prices mean less miles traveled, either by air or
land. According to a re****t by Farmers Insurance Group, a 10 percent
increase in fuel prices yields a 7 percent decline in miles driven -
indeed over the years 2003-2007 the ***ulative effect has been an 18
percent decline in miles driven.
Good news
The only ray of light over the next 18 months or so will be producers
in the energy and agricultural sectors. With oil on its way to $150 a
barrel, we will begin to see an increase in the price of natural gas,
which lags oil prices by six months or so.
Increased demand and several negative supply shocks will buoy prices
of corn, wheat, soy and other agricultural commodities.
Even if the production of these goods isn't that high in this area, we
can expect to see increases in the prices all agricultural goods as
resources are diverted toward the production of these goods.
Another positive is the falling value of the dollar. It increases
ex****ts and has buffered the economy from further declines.
Now, all we need is to attract euro-toting visitors to our corner of
the world.
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