Economy faces two powerful enemies simultaneously
Jun 11th 2009 8:00AM
Updated Dec 3rd 2009 12:00PM
The recession may be ending -- or it may be heading for a second "dip." After a number of signs that the horrible economic drop of late winter may be ending, including data from the Fed's latest Beige Book, several factors may drag the recovery to the ground.
Oil and gas prices were not expected to rise, at least not as much as they have. Oil was well below $35 last quarter. It is now above $70. Gasoline prices are back near $3 in some parts of the country. The upward trend could certainly damage large industries like airlines and automotive. Rising gas and petrochemical costs will increase the financial pressure on companies that use oil-based commodities or rely on transportation. Tighter margins often mean more lay-offs.The consumer will struggle with the rising expense of running a car, especially people who travel long distances for work. Households that were in no position to take on extra costs may face trouble making mortgage payments or covering heating costs. A rebound in consumer spending will certainly be at least partially undermined if gas does hit $3 or better and stays there. The cost of energy could lead to more foreclosures as people face large increases in their costs of living while their wages stagnate.
The second big "headwind" building against the economy is rising interest rates. After the Treasury's big auction this week, the yield on 10-year notes moved close to 4%. Everything from mortgage rates to bank loans for business are likely to be negatively affected.
The economy may be able to absorb one blow as it begins to turn around. Two blows is another matter altogether.
Douglas A. McIntyre is an editor at 24/7 Wall St.