State of the Economy: Part 3

Oil price historically has been a telltale sign of a coming recession. It is not this time because of the low interest and inflation rates on consumer goods.

An interesting perspective is that each time oil prices increase by 10%, the gross national product (GNP) declines by 0.7%. In other words, if the U.S. economy were growing at a rate of 3%, a 40% increase in oil prices would curtail growth.

The current inflation rate measured by the Consumer Price Index (CPI) is 2.3%, not including oil, food and housing. If housing were included, other than rent, the core inflation rate would only be 4.9%. Last year home values in the U.S. increased 12.4% fueled by low interest rates and low and erratic returns on Wall Street.

The federal trade deficit is clipping along to be $700 billion on an annual basis. To put it into perspective, the deficit was $111-$114 billion from 1994 to 1996. Who finances our deficit? Japan, followed by China, Britain, the Caribbean countries and South Korea.

Housing starts were a record 2.229 million in the month of February and have averaged over 2 million starts in 2004 and the first half of 2005. Let’s compare this to housing starts in the last recession. In 2000-2001 it was 1.5 million and housing starts were less than 1 million in 1990-1991 during the last deep recession.

Perspective
I was mowing hay on my farm in Virginia recently and thinking about the average hourly earnings rate in the U.S. private sector. Currently it is $15.85. Working on the Dodge Farm in upstate New York in the early 70s, my hourly pay was $2.00/hour, which was big money back then. How the world of economics changes!

My e-mail address is:sullylab@vt.edu

Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.

To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.

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