Brooklyn's Progress
August/September 2008

BY JOEL L. NAROFF, PH.D., CHIEF ECONOMIST,
COMMERCE BANK

It is halftime for 2008, and a perfect stopping point to take stock of how the year has gone. Essentially, the economy started slowly and went downhill from there. Firms are cutting workers, consumers are spending carefully, the housing market continues to falter and food and energy costs are rising rapidly. The best thing we can say is that economic conditions are weak, but they could be a lot worse. 

If we are to overcome the wide variety of problems the economy faces, we will need the consumer to keep spending. To do that, jobs must be created, not lost. For the sixth consecutive month, businesses cut payrolls in June. Worse, the losses for the previous two months were revised up sharply. Since March, more than 190,000 jobs have disappeared. While this is not huge, it is consistent with an economy that is in a deep funk (that’s a technical economic term).  

The Good News
Monthly job losses in the 75,000 range, which we have averaged this year, don’t point to an economy that is crashing and burning. But it does indicate that conditions are slowly, but steadily, deteriorating. And that is what we see with a number of indicators. Take the consumer – please. Motor vehicle sales plunged in June because few households want to buy big-ticket items given the current economic environment. 

However, all is not lost when it comes to household shopping trends. People actually went to the stores and spent money in May – retail sales were up sharply. Rebates are still being sent out and they are supporting consumption more than expected. That help should continue through the summer. Unfortunately, once the effects wear off later this year, the situation could change dramatically.

Housing Sinking
The sinking ship that is housing is still taking on water. Sales, starts, permits and prices continued to drop. It looks like home construction reduced growth another one percentage point in the spring. But it is hard to see how much further housing can go down as the sector is nearing 50-year lows. There was a glimmer of hope as existing home sales edged up in May. Although one month does not make a trend, the level has been wandering around a relatively narrow range for eight months now and that tells me a bottom just may be here. 

With the economy hanging on by a thread, you would think that inflation would be on the run. Well, it is, but it is headed in the wrong direction: up. Oil approached $150 a barrel and the average price of gasoline neared $4.10 a gallon. Food costs are still on the rise as well.

What’s Next?
An inflation rate above 4% has the Federal Reserve changing its tune. Instead of worrying about the economy, inflation seems to be slowly emerging as Job One. For the first time since last September, the FOMC did not cut rates. The Fed probably is done easing, but there is not likely to be any increase in rates until the economy has clearly turned up.  

When you add everything up, we are still growing minimally. But we need the labor market to turn around as the rebates can keep things going for only so long. Although we haven’t had a negative quarter yet, without the income generated by new jobs, that could change by the end of the year.    

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank, is a leading financial services retailer with more than 470+ convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Maryland, Virginia and Florida. Following TD Bank Financial Group's acquisition of Commerce Bancorp Inc. on March 31, 2008, it was announced that operations of TD Banknorth and Commerce Bank will be combined under the brand name TD Commerce Bank, America's Most Convenient Bank®. Today, TD Banknorth and Commerce Bank form one of the 20 largest commercial banking organizations in the United States with over $119 billion in assets, and provide customers with a full range of financial products and services at nearly 1,100 convenient locations from Maine to Florida. TD Banknorth, Commerce Bank and TD Commerce Bank are trade names of TD Bank, N.A. Commerce is headquartered in Cherry Hill, N.J.  For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com, or call 888-751-9000.