The current slowdown is temporary, despite much high-profile noise from the " gloom and doom brigade," and not the start of a another breakdown in the economy, according to Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, Intl. (FMA).
“Admittedly, some of this reaction is justifiable when one looks at the numbers released lately,” said Dr. Kuehl. “The housing market is still skidding, the consumer has retreated in the face of more inflation threats and the jobless rate has worsened. The manufacturing sector in particular seemed to lose its position as the engine of the recovery.”
Kuehl cites three reasons why the downturn will not last:
Inflation less worrisome. “Perhaps the most important factor is the unexpected surge in inflation that occurred at the start of the year, “Kuehl said. “This is not yet an increase in the all-important core rate that motivates the Fed to make decisions, but when the real rate of inflation spikes there is an almost instant consumer reaction, when the inflation comes from hikes in commodity prices.
Kuehl said oil prices may head down soon and gas prices have already eased slightly. More important, inflation is not manifesting in a way that will shift consumer behavior permanently. The three reasons for inflation- commodity price increases, shifts in the wage structure, and an abundance of money in the system – aren't all there. Inflation is the only factor so far. "The inflation pressure felt by the consumer is coming from fuel and food, and there may be some modest relief on the way for both of these sectors," he explained. "If the consumer thinks that the threat of much higher pricing is not so immediate, they will likely relax and get back to their old patterns.”
Earthquake declines easing. Kuehl sees much of the recent downturn stemming from issues caused by the Japanese earthquake, especially supply stream interruptions. "The Japanese are already starting to recover, most of those parts will be flowing soon, and by the end of the year there will be a return to some semblance of normal," Kuehl said.
Recessionary conditions are fading. Some of the conditions blamed for the expansion of the recession are fading, which will be more observable in the months ahead, according to Kuehl.
“Observers are a little baffled that banks and corporations have more money on hand than they have had in years, but that cash is not going anywhere,” Kuehl said. “The banks are sitting on it in part to contend with the wave of rule changes that stemmed from the Dodd Frank legislation, and partly because they have returned to their old-school ways. Slowly but surely, the new system is getting in place, and banks are interested again in expanding their business through loans.
The Industrial sector: "the big drop has been in inventory build"
“It is likely the export demand will return, although in fact it has not declined all that much in the past few months,” Kuehl said. “The big drop has been in inventory build, and until the consumer gets more aggressive there will not be a drawdown sufficient to provide much impetus for the manufacturer."
Kuehl added: “As in most other recoveries, the consumer will hold the key.”
Back to Breaking News