As an investor, it is difficult to watch the news or check your email these days. The moment you think you have your investments in order, someone starts talking about “double-dip recession,” and then your portfolio takes a nose dive. A few days later, after your portfolio recovers, someone else mentions the “R” word, and then another dive takes place. Repeat. And repeat. As this continues, one has to wonder if our collective fear of a double-dip recession is the fuel that will make it happen.
Markets work much like nature in that they are always looking for equilibrium, or balance. The basic tenets of economics dictate it in the laws of supply and demand. For supply, as the price of a thing (product, unit or commodity) rises, then more suppliers are willing and able to produce for the given market. Likewise, as a price for said thing falls, then more buyers are willing and able to pay for the products supplied in a given market. At some point, the meet and find a balance, or more likely, hover around that balancing point.
That then provides some difficulty with making sense of the current market. Look at the labor market. Millions of people want and/or need work. As such, the cost of a labor unit should fall, making businesses more apt to hire more employees. Following the logic, as more people get hired, there will be more wages to be spent on products, more demand for products will lead to a higher price for products, which in turn will promote more suppliers to enter the market, necessitating the need for more employees, and so on. There is probably a name for this, but let’s go with the “awesome cycle,” since it improves investments, which most people find to be awesome.
On the financial side, things start looking strange. Banks and other financial entities are swimming in money, such as Bank of America, which recorded $2.7 billion in earnings for the second quarter of 2010. Although the bank is still not reporting a profit, a statement in their second quarter financial report states that “net interest income continues to be pressured by lack of loan demand.”
The lack of loan demand is strange, and it appears to be a trend in the financial market. When a company wants to expand, it will normally take out a loan for that expansion. Want to refit a kitchen in a restaurant? Get a loan. Build a new factory? Get a loan. But the idea that a business needs to expand is based on the premise that the expansion will lead to more profits, and that is where things start to get bogged down. How to plan for what a consumer might buy tomorrow? Well, ask them.
The University of Michigan produces survey of consumers by asking about how the fell about current economic conditions and their future expectations. These are then compiled to produce an index each month. As it goes up, the demand side should see a gain, which should turn into a supply-side gain in the future, leading back to the “awesome cycle.” But consumers are worried. Some have been unemployed for a year or more. Some would like to find employment by moving to a new town, but are stuck due to their mortgage being higher than the value of their home, as reported by NPR recently. Those are real concerns, but they do not represent the majority of consumers. So what is missing?
The survey of consumers actually has the answer. Compared to August 2009, in August 2010, more people believe that their current situation was better, to the tune of 17.6 percent of respondents. If you look at the consumer expectations, though, more people now believe that the economy will get worse. Not too many more, 3.2 percent more, but that is enough for a company looking to expand.
Why make my business larger, more in debt and susceptible to the economy if the “average” consumer thinks that things are going to get worse? The companies see this, and choose not to expand. They do not take out the loan, hire more people, increase supply or demand. In short, they either do nothing or prepare the defenses for the upcoming economic onslaught.
Will happy thoughts save the economy? Not likely, but it does raise the idea that maybe the control over whether the recession “double-dips” actually is within our grasps. Maybe all that is needed is something large enough to make the workers and entrepreneurs look forward, rather than downward.