COMMERCE BANK ECONOMIC REVIEW - AUGUST 2008

“Slow but steady may be starting to win the race.”

By Joel L. Naroff, Ph.D.

There is an old saying that if you don’t like the weather, wait a minute and it will change.  We have been waiting a long time, but the economy may finally be starting to change.  We still have a weak housing market but sales are bottoming. Energy costs remain in orbit, but the satellite is starting to come back to earth – just a touch. And the financial crisis continues. Maybe the difficulties there are not over, but we know a lot more than we did. 

The root of so many of the economy’s troubles is the housing sector. Defaults, foreclosures and bankruptcies have savaged the balance sheets of financial institutions.  They have reacted by cutting back on credit and that has restrained growth. We need the housing market to stabilize if the economy is to bounce back. 

The first sign in the housing market has bottomed will come when home sales stop falling. That actually seems to be occurring. Existing home sales have been in a very tight pattern for about nine months. Yes, demand has bounced up and down and we did hit a low in June, but pending home sales are moving up. Whether it is cheap foreclosures hitting the market or prices becoming more affordable, demand is improving. A similar flattening pattern is appearing in new home sales. Okay, prices are still falling and they may continue doing that into next year in some areas. Nevertheless, there are enough positive bits of information to indicate that the worst may be behind us. 

And then there is energy. After making a wild charge toward $150 a barrel, petroleum prices hit a brick wall. Suddenly, all those “non-speculators” decided that the U.S. and world economies were not strong enough to support energy prices anywhere near to where they had risen. The result was a rout and petroleum prices headed back toward $110 a barrel – at least for now. Gasoline prices closer to $3.90 are still draining household bankbooks, but lower is better than higher.

We still face many problems. For the seventh consecutive month, the nation’s employers cut their workforces. The job losses in July were a little less than they had been but they were enough to cause the unemployment rate to jump to 5.7%.  That is the highest level since March 2004. Firms are also reducing hours worked and that means income growth should be weak. Without money to spend, households are not going to buy like crazy during this back-to-school spending season. 

Despite all the restraints on growth, the economy has yet to turn negative. In the spring, the expansion was actually a touch faster than in the winter. Yes, we are talking sluggish, tepid, disappointing activity. But in this case up is better than down and the longer the expansion continues, the greater the chance we can hit bottom and start moving upward. The economy just needs to hold on and, once housing turns and the financial sector stabilizes, growth should start improving.

Looking forward, we are clearly not out of the woods yet. But I would not be surprised if we start seeing some signs of improvement soon. Just don’t expect anything great to happen before next 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 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 and 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.