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February 12, 2008
More divergent views on whether we are in or near a recession
Yesterday, I pointed to comments by William Poole. There were also similar remarks from Janet Yellen and Charles Plosser. Both remain concerned about inflation, with Plosser appearing to be more skeptical of the anticipated moderation of inflation coming this year. (Hat tip to Greg Mankiw for the links.)
In contrast, the Philly Fed is concerned. So are many economists on Wall St.
But then we have this interesting piece from King Banaian (SCSU Scholars). He quotes from this article in his local paper. The article raises the following question in my mind: Are American households really worried about a traditional recession or are they concerned about changing relative prices causing them to adjust their expenditures? Before you dismiss the question, take a look... this could be any newspaper in any city.
Cindy Haupert's life has changed since the economy took a dive.
Haupert, 36, once lived comfortably with her husband and two children in St. Cloud. She was a stay-at-home mom, working every other weekend. Her husband is an attorney. They made ends meet.
But gas prices would rise. Costs for homemade dinners and lunches would increase. And in September, when it was time for her son to go to kindergarten, she wanted him to go all-day, every day, so he could be ready for first grade. But that meant a $184 hit to the family checkbook each month. That doesn't even count lunch money.
"Now it's like we're living paycheck to paycheck. I can definitely see a change," she said.
Prices rising faster than wages Lifestyle changes. There's nothing so far about a real recession in the classical sense. As King points out, she didn't have to pay for all-day kindergarten. The writers says this all happened since the economy "took a dive"? Did their income fall? That question is not addressed.
But the writer understands that cost of living increases is just inflation by another name...
The consumer price index for Midwestern states, including Minnesota, increased 3.8 percent from December 2006 to December 2007. That reflects the increased cost of living.
So what's a person to do?
Haupert feels it. She now works an additional four days a week at Office Depot as a cashier while her fifth-grader and kindergartner are in school.
Wait... what? She's increasing her hours worked? Isn't that contrary to what happens in a traditional recession? Sure, we shouldn't generalize from one person's experience. But this is what the newspaper is giving us, and I don't think this is the only story of its kind in the media. Is the new face of "recession" someone who has to work harder to maintain their standard of living with higher gas prices, etc.?
She tries to make up for extra costs. She clips coupons and budgets meticulously. She's allowed herself and her husband $90 per week for gas and $125 per week for groceries.
She takes advantage of mail-in rebates and uses gas coupons. She rides the bus when she can and doesn't take frivolous drives.
When she and her husband bought a new TV to accommodate the high-definition requirement for 2009, they shopped around. They checked prices to see where they could get the best deal.
When they settled on one with a better warranty, they got an extra 10 percent off for comparing prices.
Again I ask, is shopping around to get an extra 10% off an HDTV a sign of a weak economy or a smart consumer facing different relative prices?
(By the way, if they have cable or satellite, they don't need a new TV in 2009, at least not right away.)
I don't mean to diminish the cases where people have lost their jobs due to slack demand in construction or manufacturing, etc. There are certainly people who are feeling the effects of the slowing economy. And while those people may be larger in number today than, say, a year ago, they still represent a fairly small slice of the population.
Yet, so many people surveyed by the major media have a profoundly dismal view of the economy--even if they are not unemployed or particularly at great risk of becoming unemployed. And I am seeing more and more anecdotal stories like this one where what people are really concerned about boils down to the increasing cost of living (inflation) and the choices that one has to make to cope with the increased cost. Gas prices are higher. Real incomes have not increased as rapidly. Thus, one will need to cut back on gas or cut back on something else. If that means shopping around for the best deal on an HDTV or getting one that is a couple inches smaller, then that's just the way it is.
We are now experiencing somewhat slower and more uneven growth of real income than at other times in our history. The current inflation we are experiencing is also uneven in the sense that some prices are rising faster than others. Some prices (like HDTVs) are even falling. And that does create some distortions. But there's little that the Fed can do to reverse the long trend of slower wage growth. That is largely a structural problem that transcends the current recession or non-recession. There's little that the Fed or congress can do to address changes in relative prices which are the real source of dissatisfaction with the economy for so many people.
So at the end of the day, I'm not sure what to make of this. Is this just a bad article and a bad interview subject for the point the writer was trying to make? Or is this indicative of the reasons behind the dissatisfaction with the economy for a significant number of people? If the former, then this post is a cautionary tale for journalists and we can perhaps leave it at that. But if the latter, then we really need to have a talk about the difference between a real recession and other economic events that can also cause households some distress such as changing relative prices that are not necessarily recessionary.
Posted by William Polley at February 12, 2008 3:01 PM
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Comments
"Yet, so many people surveyed by the major media have a profoundly dismal view of the economy"
DUH!!!
Because they rely on OBJECTIVE REALITY for their view of the economy not BLS BS or some FED hack.
As I posted above you in AB:
*****************************
This is the part where Ponzi tries to point everyone to independent data:
http://www.shadowstats.com/
http://www.shadowstats.com/alter.../ alternate_data
BTW: Don't try investing or trading on gov data! The big boys on Wall St don't -- of course they are happy if you do.
Posted by: Edward Charles Ponzi Jr. at February 13, 2008 8:54 PM
Sorry for the delay. I have it set to moderate comments with more than one link.
Posted by: William Polley at February 13, 2008 9:38 PM
You hit the nail right on the head. I'm far from a financial expert, but what I'm seeing here is the price of "essentials" going up and driving some moderate inflation across the board, not a recession. It hasn't stopped people from buying HD televisions (non essentials) that I can see but maybe it's slowed down the "BUY ON CREDIT until you're broke" epidemic that has infected most of America! That can only be a good thing IMHO.
It is strange how the media's perception of things has so much sway over common sense and the simple facts. Frightening actually.
Posted by: AndyB at February 17, 2008 10:14 PM