May 23rd, 2008 by john 
in Categories: 
There have been so many mixed signals about the state of the US economy lately. One day a pile of negative reports is released followed by a couple of positive ones the next. I do not like being an alarmist. I am not a negative person by nature. In fact, I try to maintain a positive outlook. That being said, I also don’t believe in slapping lip stick on a pig.
I am not an economist. As I have stated before, I do read a lot and pay close attention to what’s going on around me. For some time now, it sure seems as though the negatives are out weighing the positives as far as the economy is concerned. Here are several key points that have been on my mind lately:
- Oil hit an all time high today of $135.09 a barrel, before falling slightly.
- Gas prices are approaching $4.00 per gallon.
- Annual inflation is running at 6.5 percent, excluding food and energy.
- Eggs, milk and wheat prices are up more than 30% this year.
- There is a world wide rice shortage, yes I said rice shortage.
- The housing market is in turmoil, with prices in some markets down 20%
- The sub prime mortgage fiasco continues
- Personal bankruptcy filings were up 28% in January compared to a year ago.
- Mortgage foreclosures surpassed 200 billion dollars in 2007.
I am not telling you all this to get you depressed or worse, for you tune out and shut down. I think it is important to understand what is happening to our economy. In order for you to make wise financial decisions for your family, you need to be aware of what is going on.
The question of whether or not we are in a recession keeps rearing it’s ugly head. I have read several economist opinions that have stated we are indeed in a recession. However yesterday, the government released a key economic indicator that says we are not in a recession.
Here is my take:
We are in a recession. It is just getting underway. It will get much worse before it gets better.
Why do I think this?
The two previous US recessions 1990-91 and 2001 were very short lived. Many believe this was because consumer spending held up. Put simply, people kept buying and buying and buying. This time around, most consumers are strapped with huge amounts of debt. Because of the housing crisis, most people cannot tap any more home equity. Because of the rising cost of gas and food (and just about everything else) most people have much less disposable income. These three facts combined will make it extremely difficult for the US consumers to bail us out of this economic downturn.
What Next?
So what should I do, you may be asking. I would say, expect the best, prepare for the worst. I am not suggesting locking yourself away and becoming a penny pinching miser. No! Or No! Not unless you want to! As I have stated before, I would recommend the following:
- Do not enter into any new long term debt, right now.
- Try to pay down any high interest debt, such as credit cards.
- Look for ways to trim your expenses.
- And if at all possible, start putting away some money in savings.
Conclusion
It remains to be seen whether we are really in a recession. And things could change tomorrow. But even if things do continue to get worse, you will be in a much better position to deal with it if you educate yourself about the basics of our economy and take some steps to tighten up your personal finances.
Misc Info:
Goldman Sachs predicted this month that oil could spike to $200 a barrel
About Housing:
“This year and next are going to be tough as home prices find bottom…
The housing market is in its most severe slump since the Depression, a crisis which we’re likely to be about halfway through right now.”
- Fannie Mae’s president and CEO, Daniel Mudd
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My name is John.
{ 8 comments… read them below or add one }
Hi John, nice post and here is a little fact that you may completely disagree with. The U.S. has entered a recession a few years ago but it went under the radar which is one of the reasons why this recession will be much worse than most want to acknowledge. The real recession does not show up in government figures and the traditional definition of a recession is just a pathetic joke but most like to stick with that. You don’t have to be an economist as they know less about the economy than an intelligent person. Best example…the ‘Septic Tank’ Bernanke…a professor in economics but he knows less about the economy than an Iraqi goat farmer knows about Gallium Arsenide Heterojunction Bipolar Transistor Wafers (no offense to the goat farmer). You may think that they have the knowledge about the subject as that is what they do for a living but that is just not the case (just as mutual fund managers have no knowledge about equity markets and investments but regardless are the top choice for investment advice in the middle-class). You did mention some important contributors to the recession. By the way, did you know that the government tweaked the way inflation is calculated twice in the past three decades in order to produce lower numbers to claim that everything is just fine and well contained? What makes you think that GDP figures are not tweaked as well to hide the recession as long as possible?
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John reply on May 24th, 2008 8:18 am:
@Appolo – Thanks for the great feedback, sorry for my delayed response as I am camping with the family this weekend. I am sitting in a McD’s parking lot paying for slow Wifi right now! I couldn’t agree with you more. I believe as others do, that in part, the government keeps changing the inflation calculations to keep entitlement payments under control. Payouts for government programs such as various welfare programs and Social Security are tied to the inflation rate. By keeping the official rate of inflation low, Social Security payouts grow much slower. I have heard guests of some of the talking heads suggest that if the government had not tweaked the inflation figures, Social Security payments would be 70% larger than they are today. Anyway, great thoughts! Looking forward to more of your comments and opinions!
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Hi John, very well written post. Unfortunately reading this does make me sad and depressed. It’s scary! Gas here where I live went up from $3.71 to $3.85 in one day! And I have noticed the food prices going up! Eggs! Why did eggs go up? I noticed it the other day the price of eggs is up. But you need gas and you need food right? What are you supposed to do? At least I got a good laugh out of “slapping lipstick on a pig.” Have a good weekend John!
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John reply on May 24th, 2008 8:23 am:
@Sue – Thanks for your kind words! I knew I would get mixed reactions. Who wants to read about gloom and doom. I just feel it’s so important and what’s going on in our economy is affecting so many people. I’m glad you were able to eek out a laugh!
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The negative do outweigh the positives right now, unless you’re waiting on the sidelines to buy a house. If you are, things are looking relatively decent.
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John reply on May 24th, 2008 8:24 am:
@Cully – Good point! Thanks for pointing that out to us!
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It does seem to be a perfect storm of conditions that we currently face. As unpleasant as it is, though, we should be much better for it in the long run. The credit crisis should convince millions of Americans that we can’t live beyond our means, spending more than we make. Hopefully we will see a change, if only slightly, in the American tradition of over the top consumerism. Also, the energy situation, as dire as it seems, is doing wonders for the alternative energy and green products. We’re only seeing the beginning of an enormous shift in how the world powers itself, and it should bring huge benefits to the future economy.
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John reply on May 27th, 2008 10:07 pm:
Great points Blake. But I’m afraid this latest round of economic problems may not be enough to convince many Americans to change anything. Especially if we recover somewhat quickly. People seem to have short term memory loss. As soon as the immediate crisis passes, we seem to jump right back on the spending train where we got off.
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Hi John, yes you are right the government does increase payouts with the rate of inflation and therefore an artificially low inflation rate will save several billions of dollars but makes life for those who depend on those programs that much more difficult which will have an even greater negative impact on the economy as a whole. Therefore the few billion dollars saved on the programs are more than offset by the total negative economic impact of the artificial low inflation rates and in real life costs the government even more. Most parties involved only chose to look at half the picture and mostly only the half that will favor their case. This failure or ignorance to see the full picture is the source of the negative events that will accompany the ignorance which carries a very high price tag.
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John reply on May 27th, 2008 10:02 pm:
Once again you offer some great food for thought for our readers. So how do you think we can get off this economic merry-go-round?
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Good post John!
I heard yesterday that Warren Buffett seems to think we are in for a “long, protracted” recession. I know the guy is a genius but I hope he is wrong on this one.
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John reply on May 27th, 2008 10:13 pm:
Well, time will tell. Unfortunately, Mr. Buffett has a pretty good track record of being right on all things financial. Thanks for stopping by and for the feedback! I really appreciate it.
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Its true that Social Security and other “entitlements” [they aren't really entitlements, since our tax dollars are collected separately to pay for them]are connected to the cost of living, but it is highly unlikely that the payouts would be 70% higher. The cost of living might be 70% higher, but that would only equate to a 2-4% raise in the payouts per year. The real reason that the government keeps changing the way the cost of living is calculalted is that no government would want to take “credit” for this fiasco. And they wouldn’t want talk about the real situation at election time. It is scary, but just wait until the current cost of transportation catches up with us next year! This is just the beginning.
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You raised some very interesting points. I live in a tourist area and people were saying several months ago that they have never seen business so slow. The people in this industry said when there were rumors of a recession, that this area is usually not affected by a recession. Well, now people are complaining that business is very slow and most events are not well attended. I think we are in a recession.
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