COMMERCE BANK ECONOMIC REVIEW - JUNE 2008

“The economic situation is clear as mud.”

By Joel L. Naroff, Ph.D.

Another month and the economic situation still is uncertain. In May, oil charged toward $140 a barrel, gasoline prices hit $4.00 a gallon and the unemployment rate spiked. At the same time, retailers indicated that consumers may actually be spending money and the housing market showed the first signs of finding a bottom. With data like this, economists need a crystal ball, not an economic model to figure out where things are going.

I have argued frequently that as long as the labor market doesn’t collapse, consumers will have income to spend, even if they don’t party. Well, that assumption has been put to the test. The national unemployment rate surged to 5.5% in June from 5.0% in May. 

Strangely though, like Alfred E. Neuman, I am not that worried. Why? Because there was an inexplicable decline in the unemployment rate in April. It appears the rate should have risen the previous month to about 5.3% from 5.1% in March. Then, the May increase may have caused concern, but nothing like the panic that ensued when we saw the largest jump in the rate in over two decades. Of course the fifth consecutive month of job losses also raised a red flag. Yes, the labor market is soft, but it is probably not collapsing as one would think by looking at the May data.

And then there is oil. Just as we thought the price of a barrel of petroleum would push past the $140 level, the price dropped about ten percent in a week. Had the bubble burst?  Hardly. There was an equally strong rebound, right back to where it had been. 

The oil market does not seem to be operating logically. It makes no sense to have these huge swings. Nothing fundamentally changed the outlook and that argues that more than simple supply and demand is at work. But the skyrocketing prices have caused gasoline to break the $4.00 a gallon barrier and, unless conditions change soon, the energy burden could break an awful lot of households’ backs.

Despite all the gloomy economic data, there were some glimmers of hope. Pending home sales actually rose in April. No, we cannot say the problems in the housing market are behind us. But maybe, just maybe, the sky is no longer falling. We might have seen the beginnings of the bottom being formed in home sales and that is good news.

In addition, the rebate checks are being cashed and consumers seem to be spending at least some of them. Of course, they appear to be using the money to maintain their purchases of necessities as discounters did particularly well. Even if people are not buying flat-screen televisions with the money, as long as they spend it on something, the economy can continue to grow.

So where are we? Clearly, the pressures on consumers are not easing. But the economy still doesn’t appear to be collapsing. Even if the current quarter’s growth rate winds up being negative, it may not be down sharply. But we have to watch the jobs and consumer spending numbers carefully. If they hold up, we can breathe a little easier. But if they don’t, we could be in for a real rough ride this summer. 

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.