Economy looks better on paper

At a time like this, statements of optimism have us holding our breath. In his remarks to a Boston Fed conference in Massachusetts, Fed Chairman Ben Bernanke said the economic outlook has improved from a month ago.

``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said.

What's more, just one day after Bernanke's insistence that economic risk has faded, the U.S. dollar the dollar rose to the biggest two-day gain versus the euro since 2005.

Bernanke's comments come on the heels of Mesirow Financial's annual mid-year economic review released June 9, which predicts for the second half of 2008 and the beginning of 2009 that the U.S. economy will "continue skirting a statistical recession, but that doesn't mean times won't be tough for a large cross section of the population and businesses."

The report weighs opinion from both skeptics and optimists. Optimists believe the U.S. consumer has shown considerable resilience in the face of "once insurmountable odds" the credit market would not improve. Pessimists predict the worst is still ahead of us, and we have yet to feel the impact from "much of the weakness shown with higher food and energy prices, and the drag on wealth associated with falling home prices."

So, realistically, what lies ahead? Diane Swonk, chief economist of Mesirow Financial writes "after picking up a bit in the wake of easier monetary and fiscal policy, the economy is expected to slow again at the turn of the year." That should make for an interesting Christmas.

All in all, economic conditions are expected to only feel significantly worse to Americans than they look on paper due to rising oil costs, a housing crisis and a widening income gap.

Other predictions from the report include:

  • Tax rebates and increased cash flow will provide a lift for consumer spending in the second and third quarters. However, much of that spending will be concentrated on staples instead of discretionary purchases.
  • The housing market has shown signs of bottoming in recent months. But the hype seems premature as there are still high levels of inventory on the market and there is a surge of builder cancellations.
  • Business investment is expected to rebound slightly in a response to a pick up in investment in the oil, agriculture and export sectors.
  • Inventories are expected to rebuild, which should help manufacturing activity.
  • Government spending is expected to remain relatively stable.
  • As for trade -- much of the rise in exports associated with the weak dollar is still ahead of us.
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