Signs of optimism and ease in the global recession are starting to show up. According to reports made by the Government, manufacturing and service industries located in Europe contracted in June. In fact, it was the slowest pace in nine months. At the same time, U.S. consumer spending rose very gradually in May, just like it was said on my last post. Surprisingly, the Organization for Economic Cooperation got more hopeful and raised its forecast for the economy, as well as the economy of the other thirty nations that are members of this organization. As the Financial Stability Board put it, it “noted signs of improvement in the global macroeconomic outlook and in some financial markets”. Mario Draghi, chairman of the Financial Stability Board said that the world economy is showing “convincing signs of stability”. As Mr. Draghi put it, “We observe signs of improvement here and there … Still, the fragilities of the economy and the financial system are there”. On the other hand, the Dow Jones Industrial average has been showing not the most optimistic signs. It has risen since its lowest point on Thursday, and is now in the mid 8,400s. Are these truly signs of optimism, or just a parody made by the government to keep the population happy?

Very gradual increases in the consumer spending rates have been seen, with a 0.3 percent increase in May. The Obama administration’s stimulus plans have spurred a small gain in American incomes, a rather optimistic sign that the process of getting the economy back in its track is paying off. The 0.3 percent increase mentioned before was the first gain in the past three months. Earnings have also risen by 1.4 percent, the biggest gain in a whole year. All of this events have led to the 15-year high savings rate. The consumer sentiment rose in June to its highest level since February 2008. All of the efforts done by the government to get credit working back and lift the incomes are allowing consumers to spend while the unemployment rate rises. In fact, the unemployment rate hasn’t been this high even since the 1980s. The destruction of wealth caused by the housing downturn has led to the present high savings rate. As Michael Feroli put it, “It’s still too early to look for consumers to be an engine of growth for the economy”. Signs for the future? While a 10 percent unemployment rate is expected nationwide, the average household is to save every penny it has to survive the rollercoaster path of the economy, by making smaller purchases, more conservative investments and only purchasing what it needs- not what it wants.  

Home prices have once again dropped by 17 percent in May since 2008. This is mainly good news for first time home buyers, since most of these homes are in the state of foreclosure. The drop in the prices mentioned before have contributed in mayor ways to “reduce the nation’s glut of unsold properties”, as Courtney Schlisserman said writing for the Bloomberg.com. There was a 2.4 percent rise, which brings the annual rate to 4.77 million, which is still lower than forecast. Not very surprisingly, this price drop is ranked third among the deepest on record in U.S. history. The tax breaks from the Obama administration and the significantly lower mortgage rates have made it more affordable have helped support the housing industry during its fourth year in a row of downturns. However, limited recovery is likely to be expected because of the rising unemployment rates and loan costs rising once again. In the years to come, we might see the housing market rising once again, yet very gradually. Just like I said on my last blog article, people are tending to more conservative investments. Buying a home right now is very risky for a lot of American people. This is just another one of the many effects of the recession.

As President Obama said, a “cascade of mistakes” has now made his mind to propose the biggest overhaul in the U.S. financial regulatory system ever since the Great Depression, 75 years ago. This plan to literally control the market has been very controversial in the media, especially because it is going to add a new layer of regulation for the biggest financial firms, such as the ones that were bailed out during the past year. The plan is designed to add an agency to supervise consumer financial products, let the Federal Reserve oversee the companies that deemed too much to fail, and turn hedge and private equity funds under the federal government. What would we see in the future? Most likely, a lot more government control in the market, new laws, and restrictions in how to invest in the market. President Obama says he wants to sign legislation by the end of the year. The only problem is that, by that time, the “sweeping overhaul”, will sweep the market, and all of its freedom.  

As the first quarter of the year soon comes to its end, the household wealth plunged down with a $1.3 trillion deficit; the biggest downturn ever since 1952, when quarterly household wealth was kept in record. As stocks slowly emerge, yet still have their ups and downs, and the housing market and house prices are very low, the average American household has lost a very big part of what makes up its own wealth. Even though this might seem very bad, the American people are now having different points of view towards how to spend their money, saving their money more than ever, due to the new tax breaks from the Obama administration and the stimulus plans, imposing much more government control. As Christopher Low put it, “it is going to be very difficult to have any recovery in consumer spending without jobs and incomes recovering first”. However, retail sales rose in May for the first time in three months, mainly because of U.S. shoppers buying new cars and looking for bargains due to the rising price of gasoline. What are we going to see in the future? Probably, people saving their money more, making less purchases and more conservative investments, in the struggle to keep up with the economic depression. There is no doubt that tough times are ahead.