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Published: Wednesday, 8/1/2007

The U.S. economy is no day at the beach

Dan Simpson, a retired diplomat, is a member of the editorial boards of The Blade and Pittsburgh Post-Gazette. Dan Simpson, a retired diplomat, is a member of the editorial boards of The Blade and Pittsburgh Post-Gazette.
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LET S just say that unless you are so rich you don t have to pay attention to the economy or you were at the beach, blissfully unplugged from the media last week, you probably found what was going on with the stock market alarming.

There are about seven points at which most Americans relate to the U.S. economy: the stock market, the value of one s housing, the price of gas, inflation and overall prices, the job market, wages and salaries, and, for overseas travelers, the exchange rate of the U.S. dollar.

Many, many Americans are involved in the stock market. You might think you aren t if you don t own stock, but your pension plan does. If you are one of the 63 percent of employed Americans who participate in a 401k plan, you also are probably a stock owner.

If you do follow the stock market, it was as bad last week as following the Pittsburgh Pirates or the Tour de France. The Dow Jones average had peaked the week before at above 14,000. By Friday it had dropped to 13,265.47 (which still represented a gain for the year of 8.11 percent). Investors needed strong nerves last week.

President Bush told America on Friday not to worry. The economy grew by a healthy 3.4 percent in the second quarter, as opposed to a scrawny 0.6 percent in the first. Steady as she goes. China s economy, by way of comparison, grew 11.9 percent in the second quarter.

As economists probed the stock market ups and downs, they attributed last week s precipitous fall to another distinctly discomforting trend trouble in America s housing market and the resulting impact on credit availability. New and existing home sales and the median price of houses fell in June. In other words, your house is probably worth less than it was earlier this year. Suppose that you have an adjustable rate mortgage. Don t imagine the payment will drop. Or suppose that you had taken out a home-equity loan. The payment on that loan won t drop, either.

Now, shift to the perspective of banks or other lenders. Do you want to lend money with the value of houses falling? Or do you want to do something safer with your money? But if you don t continue to feed the housing-industry beast, that will cause unemployment, lower production of steel, nails, and concrete, and in general push the U.S. economy under water.

Then there s consumption. The reaction of normal people when they have less money is to spend less. But that also causes the economy to contract. In the second quarter of this year, consumer spending rose 2.4 percent less than it did the quarter before.

All of this, with respect to the American economy, is made worse by the fact that the U.S. market is full of products made outside the United States, most often in China, which reduces U.S. production and employment and increases the foreign trade deficit, which the United States finances by borrowing, which pushes up interest rates.

In the meantime, gas prices stay high. They ve gone down a few cents a gallon from their peak, but Americans have become more or less accustomed to higher fuel prices, feeling pathetically grateful when they see a sign that offers gas at less than $3 a gallon. This smacked us in the face last week as we learned that Shell s profits for the quarter were up 18 percent and Chevron s 24 percent.

We are told that inflation is under control, up only 1.4 percent in the second quarter. We are told this is because the Federal Reserve has not lowered interest rates. Of course, another result of the Fed s not lowering interest rates is restraint on the economy through tighter money for companies thinking of mergers, acquisitions, or investing in expanding production. And if there is so little inflation, how come gas, food, and just about everything else continue to cost more, while wages and salaries remain stagnant?

To measure the impact of rising health-care costs, we have merely to look at the current negotiations between the United Auto Workers and the Big Three auto makers. Because of skyrocketing medical costs they are now negotiating who gets to go under the axe retired auto workers or the whole industry?

The job-creation rate remains anemic. Unemployment remains at 4.5 percent, not bad except that no one believes it since it doesn t count drop-outs from the economy, perpetual students, and other under-the-radar citizens and noncitizens.

As for the conversion rate of the dollar, the greenback continues to drop against the euro, the yen, and the pound. The good part allegedly is that it makes our exports more competitive overseas. The weak dollar also should attract more tourists looking for a bargain in the United States, although the Transportation Security Agency, U.S. Immigration Service, and American air carriers continue to do all they can to make us an undesirable destination except for masochists.

Maybe it s best not to think about the economy this summer. I m going to the beach.

Dan Simpson, a retired diplomat, is a member of the editorial boards of The Blade and Pittsburgh Post-Gazette.



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