Three strikes and you’re out might be the rule at RFK Stadium, but not in the U.S. economy.
Strike one: The uproar in the subprime mortgage market has the rating agencies becoming more picky; lenders are taking a longer look at borrowers before handing over money; and even the red-hot private equity deal makers are paying a bit more for the loans that finance their takeovers.
Strike two: Oil and gasoline prices remain at levels that are pinching consumers’ pocketbooks and driving up the costs of doing business.
Inflation is tame (up only 1.9 percent from last year) if you look at the “core” prices, excluding food and energy, as Federal Reserve Board Chairman Ben Bernanke does.
But members of the Fed apparently neither eat nor drive, according to consumers who find that inflation in food and energy prices is hurting them.
Strike three: Then there is the housing market, with foreclosures rising (up 87 percent from last year’s level) and prices falling.
You notice when gasoline prices rise because you have to fill your tanks every week, and you notice when house prices fall because you have less to boast about at dinner parties.
Those prices continue to fall under the pressure of rising unsold inventories. The spring selling season proved a damp squib, as a glance at the “for sale” signs festooning many streets reveals: Potential buyers are holding back in anticipation of still lower prices, and higher mortgage rates are making home ownership more expensive.
Three strikes, but the economy is far from “out.” About 132,000 new jobs were created last month, including 12,000 in the construction sector, as the commercial property market continues to flourish.
In the past year, 1.75 million workers have been added to the nation’s payrolls. The unemployment rate, at 4.5 percent, remains close to a six-year low.
The service sector showed strength in June for the third successive month. And the manufacturing sector, which was very soft in the first quarter, is growing at its fastest rate in more than a year. Most importantly, new orders are showing real strength, and the weaker dollar has exports booming.
Which may explain the general optimism among economic forecasters. On average, the 60 economists surveyed by The Wall Street Journal expect the economy to grow at rates of 2.5 percent and 2.8 percent in the third and fourth quarters, respectively, and 2.9 percent in 2008.
The 51 forecasters surveyed by Blue Chip Economic Indicators are making a similar guess, forecasting that the economy will grow at a rate of 2.8 percent in the final two quarters of the year.
With even the 10 gloomiest of this crowd expecting growth to come to a not-unhealthy 2 percent, analysts no longer expect the Fed to cut rates soon, despite the slump in housing.
With just about every American who wants to work having a job, many businesses are finding that they have to increase pay in order to bid workers away from other firms, or to induce those not in the active work force to come off the sofa and take a job.
They also are finding that it gets harder and harder to offset rising pay by increasing productivity. So unit labor costs will soon head up.
That will add pressure on businesses to raise prices. Restaurants, for example, have been hit not only with rising wage bills, but with soaring food costs, in part because misguided energy policy has diverted acreage from food production to fuel production.
So restaurants are raising their prices — and getting away with it. Fill up your tank for the drive to your favorite eatery, and you will wonder why the Fed continues to insist the “core” inflation rate — excluding gasoline and food — is meaningful.
In sum, the value of your house is down, but share prices are up. The prices of some things consumers buy are up, but so are average incomes including, I hope, yours.
The credit market has its problems, but the downgrading of bonds backed by subprime mortgages affects only a relatively small portion of such bonds. And defaults on junk bonds are at a historic low.
Three strikes just ain’t out in the economy’s old ball game.
Irwin Stelzer is the director of economic policy studies at The Hudson Institute.
