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Beige book

The price of gasoline has been declining in the Boston area. Given the understandable hysteria regarding the gulf oil spill, it is surprising that the price of gas per gallon has not doubled. Finally, broader economic forces have come to bear and prices are more reasonable. The global demand has not been as strong as predicted. This fall in prices is going to be a paradoxical problem. Despite all the government spending to increase demand, prices remain constant or are falling in general, not just oil. This is deflation. Deflation is never a good thing. Japan has struggled for decades to get into a strong consistent growth cycle and has yet to succeed.

The recent Beige Book released by the Federal Reserve outlines a mixed picture for the First District (New England). There are some positive signs such as stabilization in activity of staffing firms while biopharmaceuticals have robust sales. These highlights balance the findings of manufacturer selling prices declining while the pay rates for contract positions are declining. There is a real threat of deflation. This may be doom and gloom, but at the least, this recovery has stalled into stagflation. What is particularly noteworthy is the fact that uncertainty was so prominent in the report. Business simply does not know what changes will come. Retailers also squirm under the rising amount of declines from attempted credit card purchases. Just as the government is reaching the total borrowing amount that can be sustained, credit card borrowers have reached their limit. Unlike the government, they cannot vote themselves increases to their credit limits, nor print money to cover the debt.

What is of prime concern is employment and real estate. Staffing firms are still in demand although their revenues are down significantly. Employers are waiting for perfect candidates for permanent hire. Until then companies use temp workers after squeezing all the labor possible out of retained workers. Uncertainty rears its ugly head again. It is easier to demand increased productivity, take on a few temps at lower wages and hope for the best rather than risk taking on a new permanent hire, and all the costs, when regulatory and tax changes may force a round of lay-offs in eight months. New England may be performing better than the nation as a whole in regards to staffing, but this is cold comfort to the un and under employed. Real estate still remains the sword hanging over the head of the economy. Commercial real estate deals are slow for smaller projects and almost nonexistent for large transactions. Businesses are not moving to the area nor are new businesses being created. Vacancy rates continue to rise following unexpected jumps in unemployment. Residential real estate fares no better with home prices declining some ten percent. The home purchase tax credit that expired in April propped up home sales but the falling prices and looming foreclosure rates bode poorly for the next quarter without the credit.

The biggest problem with the economy is uncertainty. No one knows what will happen. A recent survey of economists report muted optimism for growth but there was no mention of all the tax and other cost changes due next year. As Arthur Laffer noted in a recent Wall St. Journal op/ed piece all the health care cost and the expiring tax cuts (plus the taxing of investment income as if it were earned income) will slam the breaks hard on this “recovery.” Employers only want to invest in perfect candidates for open positions since they do not know how much more it will cost to keep them employed. The BP gulf disaster is adding to that confusion. Never letting a good crisis go to waste it is expected that the President will announce a program to end the reliance on petroleum. Cap and Trade, apart from the infringement of constitutional liberties, will destroy the economy. Just as the drilling moratorium had to be rescinded in light of thousands of jobs potentially lost, the President’s environmental policies can only damage the recovery. But at least BP can be blamed. BP should give into Obama’s demand for an administration run compensation fund. With some $180 billion in cash, BP can give Obama $30 billion to compensate the Gulf States. This should be done with the caveats of BP being able to audit the fund and publish how it works and how much it pays out, as well as not being responsible for the fund’s functions nor compelled to add more money when the inevitable fraud wastes the money. Let the people of the Gulf work with the federal government instead of BP for the compensation. Current law already caps BP’s liability at 75 million. This gesture will take BP out of the crosshairs (sorry to sound too militant) and throw all the responsibility back on Obama, just as he wanted. The efficiency of the federal government has worked well so far for the Gulf; Obama’s plans should do just fine.

New England will not have to wait for some oil to drift around Florida and up the Gulf Stream to hit Martha’s Vineyard. The economic impact will whack us a lot sooner. The only bright spot is businesses are already so scared of the unknown future that they are not doing anything to put themselves are risk for injury. Too bad consumers and the unemployed are left in limbo.