Sunday, August 10, 2008
News, In this Issue...

Shmoes like us

America’s economic future will not be decided by John McCain or Barack Obama. It is being decided right now by America’s working class.

Zifty.com co-founders Todd Miller (left) and Jennifer Peté-Grahovec with the company’s new Yaris and its driver, Troy Hardigree.
Stephanie Ramage

By Stephanie Ramage

A recession, explains Betsey Stevenson, an economist at the University of Pennsylvania’s Wharton School, is most commonly defined as two consecutive quarters of negative growth.

“We have not had that,” she says.

Whatever it is we have had, it isn’t pleasant. The “economic downturn”—which seems to be the least contested term for what is happening—is in evidence. The Atlanta area alone accounted for 164,966 unemployment claims in June, an increase of more than 41,000 over the same month last year. Among the companies hardest hit have been homebuilders and the companies that sell them supplies.

“We’ve had to cut back some,” says Darren Drevig, spokesman for the Atlanta-based 200-employee company Atreus Homes. “You don’t need as many people when there is not as much demand.”

Companies that include fuel among their top costs, from major airlines to small delivery services, have also been bruised. Some have opted to raise prices rather than let people go.

Local company Zifty.com, with only 52 employees, is one of these. Co-founder Jennifer Peté-Grahovec says the company, which delivers food from restaurants as well as movies from rental stores, has endured a double whammy: an increase in the price of food, which has spurred some consumers to start packing their own lunches, and an increase in the price of fuel. 

Zifty recently raised its delivery rate by $1 to cover the increased costs, which, explains Pete-Grahovec, were partially due to the IRS raising mileage rates twice in one year, to 51 cents-per-mile in January and again to 58 cents in July.

"So, we held off as long as we could, but we had to do it [raise the delivery fee]. Not having to lay off employees was definitely a big part of that decision, " she says. "We want to keep our staff if we can, because we don’t want to decrease the level of service.” 

(See clarification below this article.)

Layoffs and higher prices are a recipe for disaster, and they are only two developments in the market over the last several years that have conspired to cook up a witch’s brew like no other.

“A lot of factors have come together at one time: high oil prices, health care costs, the credit crisis, the mortgage crisis. I can’t remember an economic downturn like this in recent history,” says John Dearie, executive vice president for policy for the Financial Services Forum.

And yet, Dearie and members of the forum, which is made up of the chief executive officers of 20 of the largest financial institutions doing business in the U.S.—including Robert Willumstad, chairman and CEO of American International Group (AIG), Kenneth D. Lewis, CEO of Bank of America, Brady W. Dougan, CEO of Credit Suisse and others with similar wallets—are not particularly pessimistic.
 
“Here is something to think about: As bad as the stock market crash of 1987 was, if you had bought a stock at its peak the night before the crash [on Oct. 19] and held onto it, 10 years later not only would your investment have recovered, but your investment would have doubled the value of the next most lucrative alternative, which was corporate bonds,” says Dearie. The trick, in other words, is to focus on the long term.

George Diamantis, divisional senior executive vice president of the Southeast Marketing Center (SEMC) of AXA Advisors, LLC in Atlanta, also takes the long view. AXA Advisors is the financial planning division of AXA Group, the 15th largest company in the world, with almost $2 trillion in assets.

“Markets have gone up and markets have crashed,” says Diamantis, who has been in the business for 24 years. “The late ’80s were not very good. The late ’90s were not very good. But, the markets got better. Keep in mind that people get used to some good years and they expect it to stay that way. Adversity doesn’t just test markets. It tests peoples’ character. If you’re someone who understands that, then you understand that when the market gets tough, you have to focus on the things that you can control and you have to work a little harder.”

That’s fine if you have a lot of money, or if, like Dearie and Diamantis, you manage the money of people who have a lot of money. They have control over their financial well-being. But what if you’re an hourly wage worker or a salaried worker who’s going to get paid the same thing no matter how hard you work? What about shmoes like us?

My dollar is as good as yours

As it turns out, people like Dearie, Diamantis and their clients do care about us, because we have the power of numbers. We overwhelmingly outnumber the moneyed affluent. In fact, of America’s 116 million households, as reported by the U.S. Census Bureau, fully 115.4 million earn less than $150,000 per year. Only 596,000 earn that much or more. So when we stop using so much gas, the price of oil comes down. When we stay home and put the credit cards away, retailers (who employ some of us) suffer, and the credit card companies and their powerful coterie of advisors have to rethink how to deal with us.

One reason for the debate over whether we’re in a recession (aside from academics’ love of debating just about anything) is that there are occasional bright spots—even for shmoes like us. Just last week, when stocks rallied (again), it was because the price of oil took a tumble the same day that the ailing dollar gained against the Euro. That was Aug. 5, the day the Federal Reserve Board decided to keep the interest rate that banks charge each other for overnight loans at 2 percent. That’s the interest rate that affects how much you and I are charged for the debt we owe on credit cards.

    The market was buoyed by a few converging factors. Oil marketers, responding to reduced demand worldwide, lowered prices. The United States alone, where some of us have parked our cars and boarded MARTA trains for a change, has reduced its dependence on oil by 3.6 percent this year as compared with 2007, according to the Energy Information Administration.

    Another factor was the good news about America’s real Gross Domestic Product (GDP)—how much Americans churn out in products and services. The real GDP increased during the second quarter of 2008 by 1.9 percent, according to the Bureau of Economic Analysis. That’s not great. In January 2005, when the U.S. Department of Commerce reported that the GDP had slowed to 3.1 percent in the fourth quarter of 2004, “the weakest growth seen in seven quarters,” people got worried. Nonetheless, our 1.9 percent growth is a lot better than the 0.9 percent growth we saw from January through March of this year.

    Stevenson credits President George W. Bush’s stimulus package. The Bureau of Economic Analysis also reported that America’s disposable personal income increased by 15.9 percent in the second quarter, from April through June, compared with an increase of only 3.5 percent in the first quarter. About half of the stimulus checks had been mailed out by the end of May, and retail sales increased by 1 percent that month, the largest bump since the holiday shopping season of 2007.

“When the government sends out the stimulus checks and people think it’s their patriotic duty to spend them, well, the fact is, stimulus checks do work better when people spend them. It doesn’t have the same effect when they are put in a savings account,” says Stevenson. “The stimulus package was quite successful. People may have spent a lot of the money on online porn, but at least they spent it. I think we have to credit the stimulus check with having been effective and with having kept us out of a recession.”

But there’s more to the increased sales than just the stimulus check, says Jeff Rosensweig, director of the Global Perspectives Program at Emory University.

“Exports have been booming,” he says. “That’s because spending power has been rising dramatically overseas and our dollar has been low. Because of the low dollar, Americans have been buying U.S. products and not taking trips overseas. They’ve been spending their money here.”

And so have others. Europeans in particular have been buying up U.S. real estate and products. Now, the dollar is recovering a bit, and New York University economist Jonathan Eaton says it may not be the result of the U.S. doing better so much as Europe doing worse.

“One explanation is that there is evidence that economic activity is declining around the world, not just the U.S. That both reduces the world demand for oil and reverses slightly the decline of the United States as a share of the world economy,” says Eaton. “In fact, countries go up and down together more than separately, but when one goes up relative to another, it is often reflected in an exchange rate. The U.S. has fallen a lot relative to other major economies in the last couple of years. Now as some others are slowing down as well, it creates an uptick for the U.S. dollar.”

What should you be doing?

Businesses and individuals (shmoes like us) are all trying to figure out what to do to energize our lagging economy. At Zifty.com, Peté-Grahovec and business partner Todd Miller thought about using scooters to cut down on their fuel costs.

“But from an insurance perspective and in terms of transporting the food, it didn’t work out,” says Peté-Grahovec. “So we just purchased a Yaris as our first company car, and we are going to see how that works out.”

    When times get tough, the tough make adjustments.
   
“Being more efficient, adding on a dollar to a product’s cost, whatever they have to do—those things will be the things that eventually right the whole American economic ship,” says Dearie. “As people pay down their debts, businesses will have a little more income and can hire a few more people. A big economic turnaround happens at the most elemental level. It happens most fundamentally at the small business and household level. It happens with decisions about saving more money. With something as simple as, ‘Should I be contributing more to my 401(k)?’”

    Wait a minute: Didn’t Wharton’s Stevenson just say it was spending money, not saving it, that kept us out of a recession? Which are we supposed to be doing?
   
The answer, says Emory’s Rosensweig, is both.
   
“You have to separate the short term from the long term,” he says. “Right now, we need Americans to spend, as we are right on the edge of a recession. However, when the immediate pressure is off, we will all need to ramp up our savings, especially to prepare for the Baby Boomers retiring.”

    And, says Wharton’s Stevenson, we can lobby our government to invest in public works projects. “There are a lot of out-of-work construction workers right now,” she says. “Putting them to work building and repairing bridges and things like that could stimulate the economy.”

    That would be nice, but in the meantime, there’s the housing debacle to deal with.
   
“We are still profitable,” concedes Atreus Homes Spokesman Drevig. “Which is an amazing thing for a homebuilder to be able to say.”
     
That’s a great thing for us shmoes to hear. Nothing reverberates though the economy like developments in the housing and real estate markets. That’s because, says AXA executive Diamantis, a house is the biggest investment that most of us make, so people get very emotional about the home market.

    “My personal opinion—this is not necessarily AXA’s, this is mine—is that the housing market has been creating an overinflated sense of doom and gloom,” he says. “Some people are worried that they paid $1 million for a home and now it’s worth $800,000. Why are they worried? If you are living in your home, and you have no plans to sell it anytime soon, you’re making the payments or you own it and you aren’t relying on it for income, then why worry? Our job is done at that point, so what is your plan for your future?”

    That’s an excellent question. For while Diamantis’ mantra might be “don’t panic,” most of us aren’t going to panic anyway. We’ll stand pat, as we always do, and pray that we aren’t laid off (and maybe make sure our employers read this article). What other choice do we have?

    Dearie takes a philosophical view, not only for the big-money movers and shakers he talks with regularly, but for us shmoes as well.
   
“Right now, there is all this analytic thinking going on about our economy and that is good, because any kind of assessment that requires you to take a good hard look at yourself also requires you to come up with a solution that you would not have otherwise come up with,” he says. “They say that in every boom there are the seeds for the bust, but it also works the other way around: In every bust, there are the seeds for the next boom.” SP 

The earlier version of this story stated that Zifty.com's $1 increase would go into effect in the next 30 days. The increase actually went into effect about 30 days prior to Pete-Grahovec's interview. So, Zifty.com customers need not worry about an additional hike in fees. We regret the error.