This past Friday was the 20th anniversary of the stock market crash of 1987, when the Dow Jones industrial average fell by more than 500 points, or 23 percent, in a single day. That was almost 60 years after the great crash of October 1929, when share prices also fell 23 percent, but over a two-day period.
Here we are in October 2007, and, in the words of the great philosopher Yogi Berra, it’s déjà vu all over again. On Friday, the Dow dropped 367 points, a mere 2.64 percent, but enough to stir up fears of still more to come.
The credit crunch that has forced some big banks in America to form a $75 billion – $100 billion bail-out consortium temporarily cheered investors up, but former Federal Reserve Board Chairman Alan Greenspan’s stated fear that this might make matters worse rather than better threw cold water on that optimism. The deal was hammered out at a meeting convened by Treasury Secretary Hank Paulson, in a display of “Goldman Sachs comes to Washington.”
Paulson is worried. He told students at Georgetown University that “the ongoing housing correction is not ending … quickly … and it now looks like it will continue to adversely impact our economy … for some time …”
He is right about the housing market. What is less clear is the impact that the housing market turmoil will have on the broader economy. Paulson is right that the economy is slowing. But slowing is not a recession.
Growth in the construction of commercial properties is picking up some of the slack in the residential sector. Exports are growing at a double-digit rate, buoying industrial output, which rose at rate of 4 percent in September.
The export boom is likely to continue. For one thing, the world economy is set to grow at the quite satisfactory rate of 4.75 percent in 2008, according tothe International Monetary Fund. For another, the weak dollar is making our goods cheaper in overseas markets, and diverting Americans from expensive European hotels to Florida, California, and in some cases American cruise ships that gladly take dollars. That’s why European businesses are so upset by a $2 pound and a $1.43 euro: Their exporters are hurting.
But American exporters are smiling. So when Bush administration officials reiterate the standard position — a strong currency is in America’s interest — take it with more than the usual pinch of salt. A weaker dollar means domestic economy up, trade deficit down. And right before the 2008 elections. That’s why Paulson wouldn’t let the G-7 communiqué include a call for a stronger dollar.
Meanwhile, unemployment remains low even in the face of slower hiring, real wages continue to rise, and consumers continue to spend. September sales were up 2.7 percent last year, adjusting for inflation, though retailers were hard hit by warm weather that made it difficult to move autumn apparel. Even sales of autos proved a pleasant surprise. It may be that the pessimists have overstated the impact of the mortgage and housing market problems on the economy.
It is important to keep fear of resets and foreclosures in perspective. The mortgages of the great majority of homeowners are at long-term fixed interest rates — no reset problems there. The drop in home values does mean that people won’t be able to use their residences as ATMs, but most are still way ahead of the game: Their homes are worth a lot more than when they bought them.
Throw in the fact that the average value of shares has increased by about half in the past five years, and that investors are about as well off as they were at the beginning of this year, and you have an anomaly. Consumers tell pollsters their confidence is falling while their balance sheets are in great shape, their incomes are rising and they continue to spend.
A similar anomaly exists in the business sector, where chief financial officers profess themselves worried about the general economy, but confident enough in their own companies’ performance to continue with most capital spending programs.
This wouldn’t be an article about economics if there were no “on the other hand.” Oil prices are headed toward $90 per barrel and credit markets, though improving, remain fragile. Unemployment is likely to increase.
Many banks are hurting, and a major financial institution might implode. Investors are dumping U.S. securities. That’s why Fed Chairman Ben Bernanke says the outlook “for the broader economy remain[s] uncertain,” But as the man said after jumping off the 102-story Empire State Building, “So far, so good.” He had reached the 50th floor at the time.
Examiner columnist Irwin Stelzer is a senior fellow and director of The Hudson Institute’s Center for Economic Studies.
