Tea Leaf: Summer brings economic anxiety

Published: Tuesday, June 7 2011 4:00 p.m. MDT

The nation's unemployment rate rose to 9.1 percent in May from April's 9 percent rate. We have long suggested that the unemployment rate could move higher at times during 2011 as more people return to the labor force. This was certainly the case in May, with a labor force increase of an estimated 272,000 people.

U.S. inflation

The Consumer Price Index rose 3.2 percent during the most recent 12-month period, exceeding the 1.8 percent rise in average hourly earnings during the past year. Sharply higher prices for gasoline and basic foodstuffs have strained household budgets, in both the U.S. and around the world.

The Federal Reserve

Tough choices are ahead for this nation's central bank. It seems clear that the 0 percent-0.25 percent target range for the federal fund rate, now in place for 30 months and the lowest level ever, will likely remain unchanged until the end of the year, if not longer.

However, issues involving additional massive monetary stimulus are up in the air. The Fed has indicated that the second round of "quantitative easing" — known as QE2 — will run its $600,000,000,000 course this month. Will the Fed enact QE3? Most forecasters would vote no, fearing the Fed could endanger its inflation-fighting credibility with even more unprecedented stimulus.

U.S. housing

The pain continues. By one major measure (the S&P/Case-Shiller Home Price index), average home values have declined for eight straight months and are now back to where they were nine years ago, in 2002.

Average prices are down one-third from their 2006 peak. Another survey notes that lower-priced homes have fallen further than high-end homes. Most forecasters see modest additional pain over the balance of the year, with price stability not likely until early 2012.

Mortgage rates

With 30-year fixed-rate conventional mortgage loans at their lowest level of the year, and very close to their lowest level in 50 years, one might think mortgage activity would be brisk. Not exactly. The combination of declining home prices, meager job creation, weak confidence levels and wary lenders in many cases has led mortgage demand to its lowest level in 13 years, according to The Wall Street Journal.

The global economy

The two largest economies in the world, the U.S. and China, are both slowing down. Number three (Japan) is flirting with recession. Europe is dealing with sovereign debt anguish, even as the German economy is doing well.

South America is growing, led by solid Brazilian performance. Mexican economic growth during 2010 was the best in 10 years, even as drug cartel violence spreads. The Canadian economy has slowed in recent months.

From here?

Many unknowns, many pitfalls, many opportunities. American consumers, the ultimate key to U.S. economic strength or weakness, will weigh the "anxiety" issues going forward. Global issues don't typically fall into our sphere of influence.

On the other hand, domestic issues do. A little clarity (and progress) from key players in the nation's capital would pay solid dividends, boosting consumer and corporate confidence.

Jeff Thredgold is the chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.

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