COMMERCE BANK ECONOMIC REVIEW - MAY 2008

“Slowdown, recession, whatever – economic conditions are not very good.”

By Joel L. Naroff, Ph.D.

The economy managed to eke out another quarter of growth during the first part of this year. But that will not change how anyone feels: We are in a major slowdown and it is irrelevant whether we technically meet the criteria for a recession. Yet, in spite of all the negative news, there is still reason to believe the situation will be improving by year’s end.

The economy actually managed to expand during the first three months of the year. Of course, a second consecutive 0.6% growth rate is hardly saying much. There were few reasons to cheer the first quarter GDP report, which was basically soft. 

The weak portions of the economy greatly restrained activity early this year. Consumers spent money, but only on services such as medical care and utilities. Meanwhile, sales of motor vehicles, furniture, food and gasoline were down. "Shop ‘till you drop" became "drop the shopping."

We have a lot to worry about when it comes to the consumer. Sky-high food and energy costs are eating into the ability of households to buy things other than the basics. On top of that, the labor market is soft, restraining income growth. Companies reduced their payrolls in April for the fourth consecutive month and hours worked were cut as well.  Income gains had been decent and helping families get by, but with wages rising slowly that may not now be the case.

In addition, the collapse in housing took a major toll on the economy and reduced overall GDP growth by 1.25 percentage points. This sector needs to stabilize before we can hope for a rebound. Surprisingly, that could happen over the next six months as activity has fallen so low that there is almost no place left to go but up. 

Businesses, uncertain about how steep the downturn would be and how long it would last, cut back on capital spending. The issue here is confidence, which is in short supply – both for business leaders as well as households. Once firms start believing that the slowdown is coming to an end, they will start spending again. 

Although households and businesses were extremely cautious, it is still possible we don’t have a full blown recession. Exports remained extremely solid. People may worry about the potential inflationary impacts of the falling dollar, but right now, exporters are doing really well. That is one key factor in the belief that the economy can sustain itself going forward. 

In addition, the checks are indeed in the mail. Okay, much of the money will likely go to paying off debt or saving for the rainy day that is already here, but there will be some additional spending. We also had the Federal Reserve lowering rates and that should help going forward as well. And the Fed is aggressively dealing with the credit crunch, which is the major problem facing the economy.

The economy is not in good shape and pressures are coming from all sides. If we don’t get a temporary boost from the rebates, growth could turn negative. So, while it may be better for households to save or pay off debt, the economy needs everyone to spend, spend, spend. 

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. Commerce is headquartered in Cherry Hill, NJ. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com, or call 888-751-9000.