Slow Data, Oil Prices & Interest Rates: Economic Commentary

Slower Recovery Shows Up in Data

Even before the employment report was released on Friday, the markets started throttling back. Not only did the stock market retreat, but so did the price of oil and other commodities. Finally, long-term rates fell to levels not seen in months. The question is–what is happening here? Did the markets just run too far and too fast and we are seeing an old-fashion correction? Or is the economy slowing down to a point that we should be worried? We don’t have the answer just yet. The fact that the economy added almost 250,000 jobs in April doesn’t sound like a slowdown and even the increase in the unemployment rate was due to more workers entering the job market, a positive sign. Yet, other economic indicators have certainly pointed to a pause in the pace of the recovery. Certainly we should be concerned about lower growth rates because the real estate markets and unemployment will not improve significantly with the recovery crawling along. On the other hand, some of the factors which are causing the recovery to slow are self-correcting. What are these factors?

For one, slower economic growth means lower gas prices. CNN reported last week that the average American family is now spending nearly 9% of their monthly income on gas–twice what it was just two years ago. Higher gas prices were a contributing factor to the slowdown in the first quarter. A retreat of oil prices will help speed up the pace of the recovery. Secondly, slower growth has translated into lower rates and lower housing prices. Now housing is even more affordable, which is saying a lot since home ownership was already the most affordable it has been in a generation. Increased affordability will increase home sales and this will contribute to faster economic growth. Regardless, we must point out that not all factors will be self-correcting. For example, the huge budget deficit leaves little room for the government to re-stimulate the economy. The shrinkage of government will continue to be a negative factor with regard to the economic growth rate this year. This again is a temporary factor as especially local and state government budgets will come into balance as the economy recovers and tax receipts start to increase. On balance, if oil prices continue to retreat and rates stay low, the recovery should pick up in the second half of the year — just as it did last year.

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