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Who's Afraid of the Big Bad Economy?

Written by: Paul Cherry

Article Overview: Sometimes it seems like the media points out nothing but bad news because it grabs viewers and sells papers. It's easy to be swayed by isolated statistics, but before you panic, look at the bigger economic picture -- you may be pleasantly surprised.

Who's Afraid of the Big Bad Economy?

One of my colleagues, Will, has given up on keeping up with the news, especially financial news. When asked why, he shrugs. "What's the point? Either the news is all bad, or the media points out nothing but bad news because it grabs viewers and sells papers. It's enough to make you want to get off the grid altogether and live off the land. Where's the barter system when you really need it?" While the current economy hasn't quite deteriorated to the point of us returning to the forest and bartering trinkets and beads, it's easy to be swayed by isolated statistics. Before we panic, however, let's look at the bigger picture.

Brian Hamilton, the co-founder and Chief Executive Officer of Sageworks, contended in a recent Investor's Business Daily article that we would still have a healthy economy as long as the following economic factors were still going strong:

1. People are working. Right now, 95% of Americans in the civilian labor force are employed. The current unemployment rate is 5%, while last year at this time it was 4.5%, only a slight difference. Considering that the average rate of unemployment over the past 50 years is 5.86%, that's not so very daunting.

2. The ability to play and pay. On average, people have enough money to pay their household bills while still having enough discretionary income left over for fun. The average household income in 2006 was $48,201. That's higher than the 2005 figure of $46,326, and quite an improvement over the 1995 figure of $38,885. Indeed, according to Hamilton's article, real U.S. disposable income has been rising nicely for over 40 years. So much for the argument that people have a lower standard of living today than they did five years ago!

3. Keeping inflation low. Hamilton estimates that the value of the currency people hold today should be worth about the same as it was one to five years ago, not depreciating substantially over time. The current inflation rate is 3.98%, up from last year's 2.78%. Over the past 50 years, the average rate has been 4.1%. Granted, the U.S. is grappling with gas prices and dependence on foreign oil, although there are efforts in motion to find alternative power sources. But in perspective, the overall price inflation isn't as bad as all that. Hamilton cites the successful and lasting efforts of Paul Volcker's Fed in the late 1970s to curb inflation's devastating effects in the U.S.

4. Sane interest rates. People are worrying about the "credit crunch," but they're still able to borrow cheaply and buy things on credit at reasonable interest rates. If anything, the interest rates are becoming more buyer-friendly over time. For instance, buying a house today means the average 30-year mortgage will cost you 5.97%. Ten years ago, the same interest rate might have been 7.13% -- down from the 9.2% rate 30 years ago.

5. GDP growth. Real Gross Domestic Product (GDP) should be growing, shown by the level of sales rising, with the value of goods and services sold and traded going up as well. As Hamilton points out, in the last quarter, GDP growth was 0.6% -- not great, but not horrific, either. Last year, GDP growth was 2.2%. Five years ago, it was 2.5%. The average real rate of GDP growth for the past 50 years has been 3.31%. True, GDP growth has slowed down, but after almost 10 years of high growth, it's only natural that the growth might slow down temporarily.

Sounds less scary now, doesn’t it? I think even my colleague Will would agree that when you look at the hard facts over time instead of speculating and panicking, you can see that America's not in a recession -- it's simply on cruise control instead of going full-throttle.

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Article Tags: average household income, bad news, barter system, brian hamilton, chief executive officer, co founder, colleagues, currency, current inflation rate, current unemployment rate, discretionary income, disposable income, economic factors, estimates, financial news, grabs, household bills, living today, slight difference, trinkets and beads



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