"I tell you what," the driver said to my colleague. "There are fewer cars on the road these days with the higher gas prices. Normally, we'd be sitting in traffic."
Naturally, of course, the driver could have been wrong. But, my guess is he was right on the mark. In fact, I believe the point illustrates what we're seeing across the nation right now in major cities, small towns and suburban communities. The fact is consumers are hurting, and it will be a while still before they feel better. We may have another year to go before the pain is truly over.
Let's consider some key facts. For one, the housing slump continues. Inventories of unsold homes remain very high. Values continue to fall, making refinancing difficult or impossible for homeowners who purchased their properties in the last three to five years. The securitization markets are still paralyzed, so lenders are extremely cautious.
Consumer confidence itself is at a multidecade low, and it's easy to understand why. Gasoline that costs over $4.00 a gallon should persist at least through the summer. The employment picture is very soft, which reduces household discretionary spending. Inflation, meanwhile, is having a big impact on the consumer's wallet because of high fuel and food prices combined. Credit card balances are up and so are delinquencies. To put it simply, we are now most certainly in a consumer-led recession.
Relief is not around the corner. The Federal Reserve is finished with rate reductions (at least for a while). Indeed, weakness in the dollar is tying the Fed's hands, and its next move could be to raise rates. Even if there were a reduction in the Fed funds rate, it really wouldn't help the consumer much anyway. It would have a marginal impact on mortgage rates and only help those who even can refinance these days.
That said, this is a time to be somber but not depressed. While it's not immediate, the positive news is there will eventually be positive news. By the second half of next year, we'll begin to see recovery. On that point, history is on our side. We know that in the first year of a new presidency (regardless of party), the first year is usually the worst economically. Then, the economy starts to turn around. I fully expect this will be the case next year, regardless of who wins the November election.
History also shows that consumers tend to adapt. So, even if energy prices remain high in late 2009 or early 2010, the average consumer will no longer experience a sense of sticker shock. Plus, if the housing market is on the rebound by that point--which it may well be--consumers will return to regular spending and more positive feelings about the economy. In turn, wages will rise, and Americans will go back to having a more positive sense about their future.
There is a bottom line message to share with credit union members and employees as they ask questions about where we're headed as a country economically: We're in a cycle. Our economy has always run in cycles, and while this is the bad end of a cycle, it absolutely is still a cycle. With the good years we've had recently, we were due for this change. Soon, we'll be due again for the good to return.
I'm pretty sure my associate who breezed down Park Avenue in a taxi would like to keep the New York City streets emptier. But, economic cycles apply to everyone. The fact is by 2010, he'll be sitting in traffic.
Dave Dickens, CFA, is executive vice president of asset/liability
management at U.S. Central. He can be reached at 888-872-0440,
ext. 6066 or ddickens@uscentral.org.
