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life in rural nebraska

Let’s be honest about the economy

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Forecasting the economic outlook for 2009 has been something of a fashionable conversation to be a part of lately.  Most folks I’ve been keeping tabs on are predicting a pretty nasty start to 2009, but a certain writer at Forbes.com is gloomier than usual.  Nouriel Roubini gives his take:

I believe the U.S. economy is only half way through a recession that will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.

Two years?  Ouch.  Roubini continues to talk more about the declines in personal consumption, losses in the housing markets, labor market losses, capital expenditures and trade.  The striking statistic that makes me sick is this, however:

The wealth losses for households related to the fall in home prices are roughly $4 trillion so far, and are clearly bound to increase further as home prices continue to fall–eventually reaching the $6-8 trillion range (compatible with a 30-40% fall in home prices peak to trough). With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500 billion.

What’s important to note is just how dire the losses that the decline in home prices has wrought on the American consumer.  If you understand how the economy as a whole functions, nearly 70% of the GDP is driven by consumer demand, ie purchases.  With a contraction in the spending habits of consumers, trending negatively, and then you add two very significant contributors to the slowdown – the collapse in the housing market and the negative-wealth of Americans as a whole, and there is reason to be worried.

A modest silver lining – rural areas on a whole have preformed much better in both the housing market and overall personal wealth versus debt.  Without as much of a collapse in rural housing markets, there is reason to be somewhat cautiously optimistic.  Without that boom, as I had talked about earlier this week, we may be spared some of the carnage taking place in California, Arizona, Nevada and Florida.

As long as the health of the rural farm economy stays stable, smaller communities may be able to ride out many of the big collapses that are affecting many urban communities.  But as we’ve seen in the ethanol industry, the fluctuations oil prices and overexpansion have have dire consequences.

Regardless of the outcome, we will need to hold on tight and hope our newly minted government can get its act together.

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Written by Caleb

January 8, 2009 at 5:42 pm

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