GRIM, GRIMMER, AND grimmest. That runs the complete gamut of the sentiment prevailing on Wall Street and, indeed, in much of the country as we Americans closed our shops for a long weekend. A recent Goldman Sachs report wails, “The economy is fundamentally weak financial markets remain fragile unemployment is still rising housing has not yet stabilized.”
At least for a few days the relentless rise in oil prices, fall in share prices, rise in food costs, and other bad news won’t, as the youngsters say, be “in your face”, as the 24-hour news services switch to special, softer, less newsy programming. So unless Israel decides to take out Iran’s nuclear facilities, or the Taliban take over Peshawar, or al Qaeda commits some spectacular atrocity in Baghdad, or some investment bank decides to follow the example of Bear Stearns and implode over a weekend, or the home team drops three games, blessed calm will prevail in the land, and the battalions of sorrows that have been descending on the economy will be forgotten, at least temporarily.
Today we celebrate our declaration of willingness to fight hard to liberate ourselves from the English yoke–no taxation without representation, and freedom from a king who, among other things, “has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.” Nothing much changed on that score, except that it is Washington politicians rather than the English monarch who are doing the eating.
With the possible exception of Al Gore, one of the nation’s largest consumers of electricity (he uses twice as much in a month as the average family uses in a year), no one much cares that our celebration might create one of the largest carbon footprints on the planet as millions of us barbecue hot dogs and hamburgers, and a brave few hop into our SUVs for a drive to the beach or to visit relatives–perhaps one of the last times many of us will fill the tanks of our beloved behemoths with $4.50 gasoline merely for a holiday jaunt. Still, America’s share of worldwide carbon emissions is about in line with America’s share of worldwide GDP, so we can console ourselves that per unit of output we are no dirtier than our severest critics.
Indeed, since President Bush will use next week’s G8 meeting to urge his reluctant colleagues to keep their word on aid to Africa and the fight to stamp out AIDS, and to join America in supporting a successful completion of the Doha trade-opening round, Americans can fairly permit ourselves a feeling of moral superiority after a decade in which many of our allies used us as their favorite piñata.
Americans are generally in the habit of counting their blessings on a holiday such as this. And many will do just that. At one famous Fourth of July party in Washington it is the practice of the host to read the entire Declaration of Independence. At other gatherings folks with a bit of historical perspective will remind themselves that even though our economy is troubled, we still live better, and freer, than almost any other nation in the world.
But with Monday morning comes a return to harsh reality. Which goes something like this: The stock market is in bear territory, with shares down some 20 percent from their October highs. Car sales are at a ten-year low, General Motors’ shares are selling at levels not seen since the 1950s, and there is noise on Wall Street that GM, Ford, and Chrysler might be running into liquidity crises as cash flow shrivels–all three insist they have enough cash and credit lines to ride out the downturn. The only thing that keeps news about the auto industry in the grim rather than the grimmest category is the auto makers’ inability to meet the demand for fuel-efficient vehicles. It will take time to shut down the factories turning out 4WDs and rev up output at plants producing smaller cars.
News on the housing front is not much better. Housing starts have fallen in half from their January 2006 peak. The National Association of Home Builders’ index is at an all-time low; inventories of unsold houses remain high; and foreclosures are rising despite some 1.6 million loan workouts negotiated by a coalition of lenders under severe pressure from the Bush administration. This news probably falls in the grimmest category, although Treasury officials are holding to the view that the problem is regional, rather than national one, with the bulk of foreclosures and price drops concentrated in California, Nevada (mostly Las Vegas), and Florida. Average prices in Manhattan continue to rise, driven in part by foreigners: With the every euro buying close to $1.60, property in New York seems a bargain to Europeans.
Perhaps most important of all is the jobs market, because consumers’ attitudes are shaped by their view of their prospects of holding on to their jobs, or getting new ones if they are laid off. Friday’s jobs report was about in line with expectations, which means that the good news is that the bad news wasn’t worse. Nonfarm payrolls dropped by 62,000 in June, and earlier reports of jobs losses were revised upward by 52,000. Since December, nonfarm payrolls are down by 438,000. More bad news is likely, since claims for unemployment compensation are also rising. The only glimmer of light in this otherwise dark picture is that the unemployment rate remains at 5.5 percent, not high by historic standards.
What distinguishes the merely grim from the grimmest school is the length of the tunnel through which they are seeing light. The grimmest are waiting for multiple pairs of new shoes to drop. The merely grim believe that most of the shoes have dropped, and that future write-offs in the financial sector will not be anything like what we have seen in the past. As the week ended, shares in financial-sector firms began a tentative recovery. Merrill Lynch is probably going to post losses for the second quarter, and might need new capital, but can sell its interests in BlackRock or Bloomberg to raise the odd billions. Lehman Brothers, the most troubled of the investment banks, with shares down about 70 percent for the year, believes it has stemmed its best employees’ rush for the exits by distributing shares to all staff, the shares to vest in three years. All in all, as Treasury Secretary Hank Paulson told an audience in London, financial institutions in the US have been successful in raising capital equal to 95 percent of their recognized losses.
Fortunately, these problems, too, shall pass. American are deeply displeased with the performance of the president and Congress–only 13 percent and 6 percent of those polled expressed confidence in Bush and Congress, respectively–and unhappy about their own economic prospects. But 81 percent still believe the US “has the best system of government in the world.” Brenda O’Brien, a professional at the Snell & Wilmer law firm in Phoenix, where the real estate boom has come crashing to a halt, put it best, “Hey, we’re Americans. We’ll get through this.” So we will–if we survive our Fourth of July binge on junk food and beer.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
