Economics
Good news
IT WAS about one year ago that the phrase "green shoots" began being batted around, as economic trends which had been deteriorating at an increasing pace started deteriorating at a declining pace. Such were the small victories celebrated early last spring. By late summer, a number of important economic indicators"”including GDP"”had moved all the way back to expansion, and many economists felt comfortable asserting that the recession was officially over. But for the next nine months, there was little sign that the recovery was feeding back through to the labour market, or that it would prove particularly durable in the absence of government supports.
As of the first full week of the second quarter of 2010, it seems possible that yet another economic hurdle has been leapt, and a self-sustaining recovery appears within reach. The latest data releases from the Institute of Supply Management show that the manufacturing sector grew in March for an eighth consecutive month, and at the fastest pace since 2004. Service sector activity expanded in March for a fourth consecutive month, and at the fastest pace since 2006. Meanwhile, equities, commodities, and interest rates have all ticked upward in recent weeks, a fairly good indicator that markets are increasingly confident about the state of recovery.
But while growth in commodities prices is a positive sign, it's also a potential threat:
That's the price of a barrel of oil over the past year. As the global economy has continued to move away from the abyss, the price of crude has climbed back to near $90 a barrel. Increases much beyond that will begin to squeeze household budgets in places heavily dependent on oil. If those increases happen slowly, then they won't be that damaging; households will have time to adjust commutes, buy more efficient vehicles, and find other ways to substitute away from petrol. If they happen rapidly, then the result will be enough damage to consumer spending to tip the American economy back toward, and perhaps into, recession.
There's really not much that can be done about this in the short term. Officials simply need to hope that households have continued to reduce their exposure to petroleum prices in the wake of the 2007-2008 spike in the cost of crude.
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"Meanwhile, equities, commodities, and interest rates have all ticked upward in recent weeks, a fairly good indicator that markets are increasingly confident about the state of recovery."
Or that the liquidity that the Fed is creating is bulging out over the sides and fueling speculation in these markets.
Let's get the hot money out of commodities futures. Leave them to producers and consumers who have real insurable interests, and market-makers who can use naked derivatives only to the extent necessary to do their jobs.
If oil prices rise, I'll just drive a bit less - cut trips to the mall - and spend less there. As for spending $20k to save $500/year on gasoline, nope, not a good deal. I can wait for "Cash for Clunkers II".
I'm not worried about commodity prices. I have noticed that on the stock selling shows they reccommend having commodities in one's portfolio. Let's see how this works out, probably as well as "you can afford more spend more on a house because interest rates are low" a few years ago.
Let's see what happens to house prices as the interest rate on the 10 year bond continues its upward climb.
Regards
There will be no recovery as long as oil is above 70.
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts.
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