The economic rollercoaster ride becomes wilder

ECONOMIC REVIEW

I hope your seat belts are fastened. Just when we thought economic conditions were deteriorating sharply, the economic data turned. But after our sighs of relief, the losses from the risk-taking in the financial sector hit home, and major firm after major firm an- nounced large losses. In the midst of all this, the equi- ty markets bounced around, and the Federal Reserve System decided to take out some additional insurance just in case the economy started going south again. In other words, just another month in this long-running, greatly uncertain year.

Because the economic world seems to revolve around the housing market and foreclosures, let's start there. The report on summer foreclosures was awful. According to RealtyTrac, the level rose 30 percent from the spring and was almost double that posted in summer 2006. The pain was spread across the nation - only five states didn't see a rise in foreclosures over the year.

With defaults skyrocketing, it wasn't surprising that home sales and housing starts faltered. New construction was off more than 10 percent in September, and the pace was down 30 percent over the year. "Fire sales" helped generate some demand for new homes, but the existing housing market continued to fall apart.

Still, housing isn't the only part of the economy that matters. Ultimately, it is all about the consumer, and for households, it is jobs and income. Well, that aspect of the economy is doing decently. In October, businesses added 166,000 people to their payrolls. The unemployment rate remained at a fairly low 4.7 percent. Yes, construction and manufacturing were problem areas, but the gains were broad-based. As a consequence, income growth remained decent.

With consumer confidence ebbing, businesses are worried that the holiday shopping season will not be very good. But one thing we have learned is that although people may express concerns, if they are not anxious about losing their jobs and they believe their income will continue to grow, they spend money. The employment situation is decent enough that households will likely spend money this season. It may not be the greatest year for retailers, but it may turn out to be better than feared.

In the face of continued deep housing problems but good job growth, the Federal Reserve met. After having cut interest rates by a half percentage point in August, it was not clear if the rate-setting committee would once again reduce rates. But they did lower rates, this time by a quarter percentage point.

The move by the Fed was debated sharply. With oil nearing an unfathomable $100 a barrel level, fears persist that inflation could reaccelerate. The Fed has done a good job in reducing the inflation rate, and the members don't want to lose that gain.

So, why did the Fed move? Unfortunately, the housing problems have real implications for the economy in general. Large financial institutions invested heavily in mortgage securities and now are looking at significant losses. This reduces the ability of those firms to lend money and could lead to a further tightening in credit. And if credit is reduced, companies of all sizes will suffer, and growth could slow. Therefore, the Fed decided to take out some insurance by cutting rates.

Will it be enough? As long as jobs keep being created, we should be able to withstand the subprime and oil problems.

[Sidebar]

...If (people) are not anxious about losing their jobs and they believe their income will continue to grow, they spend money.

[Author Affiliation]

Joel L. Naroff Is chief economist with Commerce Bancorp of Cherry Hill, N.J. The bank shares the Commerce brand with Swatara Township-based Commerce Bank/ Harrisburg.