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Friday, November 21, 2008

The Economy's Silver Lining(s)

Every single day we hear about new reasons to be sour on the market. Unemployment numbers, retail sales numbers, and consumer confidence numbers all point to dire economic futures for all. In the gloom of a dire economic forecast, are there two reasons to be hopeful? In fact, there now maybe emerging two reasons to be hopeful for the economy.

The first hopeful sign is that the dire economic outlook has sent oil pricing on a never ending downward spiral. Oil prices have crossed below $2 a gallon for the first time in year plus years. It appears that there is no end in sight for the drop and it's possible that gas prices could fall below $1.50 and maybe even lower. Low oil prices will lead to lower prices on all sorts of things from shipping good, transportation, airlines, and trucking. By decreasing a major cost for many industries, this will also mean more money for another labor cost in each of these industries, labor. Furthermore, consumers will spend significantly less on gasoline. This will leave more money for many other goods monthly.

Exploding gas prices had a significant effect in
(oil prices since 2007 above) perpetuating the economic downturn. Deflating oil prices will help soften the blow on the economic downturn to come. Beyond this, most other commodites grain, wheat, corn, etc. have also plummetted. This causes everyone's grocery bill to be less. It also causes another major expense for many companies to fall as well.

The economic downturn has also caused most short and long term rates to drop furiously. The ten year U.S. Treasury is now at levels not seen in decades. The U.S. Treasury is the pre cursor for most long term rates. The furious drop in the Treasuries has sent Mortgage rates lower and the 30 year fixed rate is now again below 6%. Another half a point drop in mortgage rates will likely set off another mini refinance boom.

Another mini refinance boom maybe just what the doctor ordered in getting the real estate market moving again. It was the refinance boom of 2001-2003 that held up the economy in its last down turn. If mortgage rates get to 5.5% on the traditional thirty year fixed, that should also spur at least a bit more buying in real estate. All of this is exactly not only what the real estate, banking, and mortgage markets all desperately need, but frankly it is needed by the economy as a whole.

Both the dropping price in oil and the dropping long term interest rates are two hopeful signs that there maybe two reasons to believe that the economy's downfall maybe softened.

(ten year U.S. treasury YTD above)


Anonymous said...

how many people will be out of work due to the deflation scenario you say will soften the landing? if history is any guide it will only prolong the recovery.

mike volpe said...

I'm not sure how many people will lose work because gas and food prices are low and because mortgage rates are low.

If history, recent history, is any guide, low mortgage rates can be the savior of an economy.

You will need to be specific about what problems my silver linings have.