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  • Economic Forecasts and Misleading Averages

Economy

08 Feb 2009

Economic Forecasts and Misleading Averages

  • By Bill Conerly
  • In Economy

Consider some assertions that seem to justify a “gloom and
doom” conclusion:

 

  • Consumers
    were using home equity as an ATM, spending well above their means, so they
    now have to cut way back.

 

  • Too
    many housing units were built in the bubble days, so there is no need to
    construct another new house in 2009.

 

  • Corporations
    have falling sales and falling profits, so they won’t spend a dime to
    increase capacity this year.

 

These assertions make sense on the surface, but consider
these counter-factuals:

 

  • Last month 656,976 Americans bought a
    new car, truck, or SUV.  And January
    is normally a weak month for car sales. 
    Don’t these people know we’re in a recession?

 

  • In December, builders began construction
    on 37,100 new housing units, despite bad weather in many parts of the
    country

 

  • Last month, companies placed orders for
    $86 billion of capital goods: machines, computers, and transportation
    equipment.

 

How do we reconcile
the doom and gloom assertions with reality? 
Here’s the important point:  we
have a very wide variety of circumstances in the economy.

 

Consumers, for
example, are not all the same.  About
one-third of homeowners do not owe any money at all on their home.  They are “right-side-up” in the extreme.  Many workers are not at risk of being laid
off.  There are 47 million workers in
industries that have gained jobs in the past year.  In other industries, there are workers who
have seniority, or their companies are strong, or some of the individual
workers are vital to the business.

 

There are certainly
many people at risk in this recession.  I
don’t want to downplay their concerns. 
However, it is important to recognize the variety of circumstances that
workers find themselves in.

 

What explains
homebuilding in the face of a national excess supply of housing?  One of my clients, Arbor Custom Homes (

Portland

,

OR

)
continues to build new homes.  There are
prospective buyers who are NOT looking for a generic home.  They are looking for a specific type of home,
in a specific neighborhood, with specific features, at a specific price
point.  Arbor serves these customers
despite the national recession.

 

And those companies
ordering equipment?  Some businesses are
not very sensitive to  recessions (health
care and consumer staples, for example). 
They are expanding their capacity. 
Other companies may not need to add capacity, but they see opportunities
to lower their operating costs with new equipment.  Yet other companies don’t need to expand now,
but want to be ready with additional capacity when the economy does turn
around.  As a result, some companies are
buying new equipment.

 

The economy is in
recession.  Many people are hurting, many
businesses are hurting.  But the variety
of circumstances means that a good deal of spending will continue, forming a
base for the coming recovery.

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