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MONDAY, OCTOBER 20, 2008
<table border="0" cellpadding="0" cellspacing="0" width="100%"> <tbody><tr> <td colspan="3" class="graytimes18" align="left" valign="center"> <table align="left" background="/img/w.gif" border="0" cellpadding="0" cellspacing="0"><tbody><tr><td class="graytimes18" align="left"> BARRON'S COVER </td></tr> </tbody></table> </td> </tr> <tr><td height="14">
</td></tr> </tbody></table> <script type="text/javascript" language="javascript1.2"> <!-- var digg_bodytext = 'Iy+may+feel+as+if+the+sky+is+falling%2C+but+thing s+aren%27t+as+bad+as+they+seem.+Our+saviors%3A+che ap+oil%2C+strong+exports+and+inventory+rebuilding. '; var digg_url = 'http://online.barrons.com/article/SB122428335256346205.html'; // --> </script> <!-- ID: SB122428335256346205 --> <!-- TYPE: Barron's Cover - Main --> <!-- DISPLAY-NAME: Barron's Cover --> <!-- PUBLICATION: Barron's Online --> <!-- DATE: 2008-10-20 00:01 --> <!-- COPYRIGHT: Dow Jones & Company, Inc. --> <!-- ORIGINAL-ID: --> <!-- article start --> Sorry, Chicken Little <dateandtimestampwithbr></dateandtimestampwithbr>By GENE EPSTEIN<dateandtimestampwithbr></dateandtimestampwithbr>
It may feel as if the sky is falling, but things aren't as bad as they seem. Our saviors: cheap oil, strong exports and inventory rebuilding.
THESE ARE HARDLY THE BEST OF TIMES FOR THE U.S. ECONOMY. But they may not be as bad as you think. The credit crisis, stock-market crash and fall in home prices have raised legitimate fears of a nasty and protracted recession. Yet the economy has often proved more resilient than is commonly thought -- and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record.
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The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum's recent slide.
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What's the most likely scenario? We're now in the roughest patch. Real -- that is, inflation-adjusted -- gross domestic product probably grew at an annual rate of 0% to 1% in the three months ended Sept. 30 and will do no better in the current quarter. Growth should then accelerate, to an annualized pace exceeding 1% by 2009's first quarter and 2% by the second. By the third and fourth quarters, something resembling a recovery will have begun, with annual GDP growth topping 3%. However, the unemployment rate will continue to rise through mid-2009. This reflects the reality that, since mid-2007, real GDP hasn't risen fast enough to prevent joblessness from climbing and won't until the end of 2009.
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What, then, will help boost real consumer spending? For one thing, labor income should rise. The projected jobless rate of 6.2% is still fairly low by historical standards, and should be enough to lift wages and salaries. With energy prices falling and food tabs moderating, the headline consumer price index may even go negative for a few months. It should certainly be low enough to permit an increase in real wages and salaries.
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EARLY IN 2009, inventory rebuilding could resume, to remedy the inventory liquidation that started late last year and that has pushed inventory-to-sales ratios unusually low. The only inventory overhang currently is in vehicles, and is partly attributable to a scarcity of auto loans. But as the credit crunch eases, auto sales probably will pick up. If gasoline prices don't rise, consumers may be more willing to buy the now-unwanted cars that are less than fuel-efficient. In any case, the stage could be set for inventory rebuilding of all other manufactured goods.
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