- The Washington Times - Monday, September 15, 2008

COMMENTARY:

Nightly news coverage of the economy has been a little like reporting the strikes and outs in a baseball game, while ignoring the hits, runs and double plays.

The economy’s downside is well-known: 6.1 percent unemployment, up from 5.7 percent in July; 84,000 nonfarm jobs lost in August, its eighth consecutive monthly decline; falling home prices that have still not reached bottom; a credit crunch, home foreclosures and delinquent mortgages that are near 10 percent of homeownership; worrisome inflation; weak retail sales; low consumer confidence; and a bear market that has pounded stock portfolios.

On the other hand, while the doom-and-gloomers don’t like hearing this, there’s still a lot of life and resiliency in the U.S. economy. It grew by a fairly decent 3.3 percent in the second quarter, up from 1.9 percent in the first three months of this year.

In other words, we were still growing in the first half of this year, and we will continue to grow in the last half, though probably at a slower rate. We are not in a recession that so many bears have long predicted.

Wall Street economist David Malpass, who does not run with the pack, thinks “there’s an underestimation process at work similar to the second-quarter miss (though not as big)” of GDP growth when the consensus was 0 percent.

He forecasts 2 percent growth in the third quarter and 3 percent in the fourth. Not the growth we need to pull ourselves out of an economic hole, but it’s growth nonetheless.

We’ve endured high oil and gas costs in the past year, but oil prices have fallen sharply off their highs, and gas prices have been dropping, too. Across the Potomac, in neighboring Virginia, a gallon of regular is going for $3.35 a gallon - though gas remains higher in many other states.

Fully 90 percent of American homeowners either own their own home outright or are still paying their mortgage on time. Homes are still sold and built, but at a much slower pace.

Gloomers wring their hands over the number of homes foreclosed and put on the market, but all of them will be bought eventually when interest rates are low enough, and, as housing inventories decline and demand grows, prices will begin to rise again.

We keep hearing about the credit crunch and warnings that it will “crimp businesses and consumers,” said Mr. Malpass, but he thinks “this already happened, causing the sharp slowdown in the fourth quarter of 2007” when GDP fell into minus territory.

“There’s now too much emphasis on banks and housing (they don’t drive GDP) and not enough on low real interest rates and pricing power (which are proven GDP drivers),” he said.

It is not true that banks are no longer lending money to qualified homebuyers. The 30-year mortgage rate fell to 5.93 percent last week in the immediate wake of the government’s takeover of Fannie Mae and Freddie Mac.

Meantime, real interest rates and inventories remain very low, “by past experience a promise of stronger growth ahead,” Mr. Malpass said, adding, “Consumption growth slowed last winter as expected, creating pent-up demand. In the third-quarter GDP, real consumption will also get a boost from slower headline inflation.”

The strongest pillar propping up the U.S. economy is exports. We have been selling a lot more of what we make and grow ($1.6 trillion annually), and that has contributed much to a stronger 3.3 percent GDP rate.

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