Several readers have followed up with me extensively on this. How can I possibly feel positive about the economy when, over the last year, several banks and investment firms have completely failed, the federal government has tossed at least a trillion dollars to bail out many other companies, unemployment has skyrocketed, and the stock market has fallen on its face?
Here’s the truth: I don’t listen to CNBC or other mainstream sources for my economic and personal finance news. Almost always, those sources try to take the actual facts and try to spin it into a larger story, making it sound as though a bad piece of economic news is “proof” of something disastrous and good pieces are often put up as exceptions to the rule.
Instead, I look at the following:
How are the people around me doing? I know a couple of people who have lost jobs - a number that’s completely in line with the rise in unemployment. Quite a few more are cutting back on their spending, mostly as a way to protect themselves against a potential job loss that they fear.
Most of the people I know, though, aren’t changing a single thing. I know people who are buying cars, shopping for homes, buying consumer goods, and so on.
How does that compare to real numbers? Is this just my own experience, or is it in line with the real numbers out there? Well, the actual unemployment rate changed from 4.9% to 7.2% from December 2006 to December 2007 - a difference of 2.3%. In other words, out of every 100 people I know, two more should be unemployed right now than a year ago - and that’s pretty accurate.
What about consumer spending? Most accounts have consumer spending dropping about 4% during 2008, which makes it appear to be a truly terrible year. However, what’s being left out of that picture is that 2008 had virtually no inflation - almost every other year has at least 3% inflation, which artificially boosts that consumer spending number. In a year with normal inflation, the consumer spending would have appeared unchanged and thus there would be little or no panic about it.
What about stocks? The last eighteen months saw a very rapid drop in stock values - about 40%, depending on what index you use.
However, if you go back and look at the last recession, from mid-2000 to late 2002, we saw almost the same exact percentage drop in the stock market - about 40%.
The big difference between the two was the speed of the drop - but the speed of the poor economic news was much more rapid this time around, too. The typical signs of recession - a popping bubble in an economic sector, rising unemployment numbers, and so on - all lined up very tightly this time around - but the numbers themselves weren’t that unusual.
Even more noteworthy is that since November, the stock market has basically leveled off, with behavior that mirrors what happened in late 2002 and early 2003 at the end of the last recession. In fact, the stock market from 2003 through 2008 looks almost exactly like the stock market from 1996 to 2003. The only differences are the speed of the rise (faster in the earlier one) and the speed of the fall (faster this time around).
Things I’m not seeing I’m a student of the Great Depression. I’ve talked to many people who lived through those years about their experiences and read countless books on the subject.
We are not living through anything that even compares to the Great Depression, and to even imply that we are is simultaneously deeply insulting to those who did live through it as well as woefully ignorant as to what it was like.
There are no block-long lines for soup kitchens. More than 90% of the nation is fully employed - not the 60% or so employment of the 1930s. There is no “dust bowl” - soil and water conservation practices have made such a huge loss of our nation’s bread basket impossible. People aren’t going to lose their money to bank failures - the FDIC has them insured.
What do I read to get my information? I read most of the same media sources that everyone else does. The only difference is I don’t care about much of the commentary. I just ignore it and look at the numbers. What do they really mean? How do they compare to what I see in my own life?
The rest of those articles - the pieces that attempt to paint a frightening picture - are mostly spin. Don’t worry yourself about them.
So, my take is… As far as I can tell, this is a pretty typical recession - perhaps a little stronger than a typical one, but nothing comparable to what happened in the 1930s.
Yes, there are a lot of ominous economic signs out there. But there are very ominous economic signs during every recession - virtually every down turn has bubbles that pop and situations that seem apocalyptic.
What I see, though, is that almost everyone I know is still fully employed. The local food pantry doesn’t have a line out the door. No one is seeing their life savings disappear in bank failures.
That’s the state of the economy as I see it - a strong recession, but nothing we won’t survive.
The Simple Dollar chronicles a man's road to recovery from "total financial meltdown." As author Trent Hamm puts it, "The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two." We'll post a couple of entries a week, but you can check out his writing daily at www.thesimpledollar.com