A Tale of Two Economies

09/04/2008 12:00 am EST


Howard Gold

Founder & President, GoldenEgg Investing

Like many American families, we went shopping over Labor Day weekend.

Last Sunday, we drove about an hour north of New York City to Woodbury Common, a massive outlet mall with more than 200 off-price brand-name merchants from snooty emporia like Prada and Versace to mass-market purveyors like Nike and Gap.

Woodbury is usually crowded, but this time it was unreal. The parking lot was so packed by 11:00 AM that it took us half an hour to find a space. I waited 20 minutes for a lukewarm Grande at Starbucks.

Shoppers patiently queued up behind velvet ropes outside outlets like Coach and Burberry as if they were trying to crash the hottest Hollywood club in HBO's "Entourage." And when we finally left, it took nearly 90 minutes of blissful idling before we could get out of the mall and onto the New York State Thruway.

"So, where's the recession?," I thought while waiting for the SUV in front of us to move another five feet forward.

Flash back to a couple of weeks ago, when we were in California on vacation. At our hotel in Yosemite it seemed like a meeting of the European Union: French, Italian, Spanish, and British English filled the corridors. I asked a waitress and cashier how many Europeans were there and they both agreed it was two-thirds to three-quarters of the people they served.

So, where were all the Americans? Maybe they were staying in budget motels or camping out on the Valley floor. Maybe the Californians were too smart to travel to Yosemite in high season. Maybe others just didn't want to spend the airfare and $4.00 a gallon gas. Or maybe they were all shopping at Woodbury Common.

Whatever the reason, it sure looked as if California was in a recession.

And there you have it: we really have two economies in the US. One is holding up pretty well; the other is overwhelmed by foreclosures, tighter credit, and higher gasoline prices. In one economy people are tightening their belts a little, but not much more. In the other, it feels like the worst economic slowdown since the 1980s, even World War II.

The statistics don't capture the reality. Although jobless claims have risen and Friday's data may show an increase in the unemployment rate over July's reported 5.7%, neither figure has matched those of previous recessions-yet.

And shockingly for the doom-and-gloomers, revised gross domestic product (GDP) numbers for the second quarter showed a pretty solid increase of 3.3%.

Though largely powered by exports, that much economic growth typically doesn't occur in a real recession, no matter which definition you use.

The deeper you dig into the data, the more clear it is that the US economy is sharply divided, and the fault line is usually where the housing bubble was the frothiest and the housing bust the most severe.

Generally the Northeast, Texas, and the Mountain States are holding up well. The bubble states-Florida, Nevada, and Arizona-are struggling. By some measures the Pacific Northwest has recently fallen out of bed. Parts of the industrial Midwest, especially Ohio and Michigan, are reeling from the auto industry's fading fortunes and a wave of predatory subprime refinancings that have devastated some communities.

And California-the nation's most populous state by far, whose GDP alone would make it the world's tenth largest economy? It is "on the brink of a recession," a study released by the Los Angeles County Economic Development Corp. (LAEDC) last month said.

In July, California's unemployment rate stood at 7.3%, significantly above the national average and up nearly two percentage points from July 2007.

Even in the Golden State, however, people's fortunes are based on where they live. Residents of Northern California's technology corridor of San Francisco and San Jose aren't feeling too much pain.

But in the central and southern parts of the state, where developers built acre upon acre of subdivisions and borrowers got loans with nothing more than a smile and a shoeshine, new developments have turned to ghost towns, foreclosures are as common as stop signs, and unemployment is soaring.

Jack Kyser, the LAEDC's chief economist, says unemployment in the Inland Empire, the vast area east of Los Angeles, could skyrocket, topping 10% in Riverside and San Bernardino counties. In Merced in the Central Valley (not far from Yosemite), an astounding 85% of homeowners have negative equity, meaning their houses or condos are worth less than their mortgages. That's a recipe for massive abandonment, bankruptcy, and financial ruin.

Combine that with high gasoline prices and a shaky job market and who wouldn't feel we're in the worst economy since the Depression?

The Golden State, which is also trying to cope with an eye-popping $15-billion state deficit, may face a long uphill slog: one out of every eight jobs in southern California is related to housing, estimates economist Sung Won Sohn.

And housing there won't recover any time soon.

Meanwhile, the latest Federal Reserve beige book, released Wednesday, talks about "little further deterioration" in its Boston district and "signs of stabilizing" in New York. Economic growth "improved slightly" in Kansas City (which also covers Colorado, Oklahoma, and Farm Belt states), while the "economy expanded modestly" in the Dallas Fed's region. That may sound like damning with faint praise, but given the alternative I'll take it!

The overall economy may continue to weaken as the housing bust and the credit crisis bite deeper. Lower oil prices may hurt Texas and the West, and more layoffs on Wall Street could send the Northeast reeling. Meanwhile, a resurgent US dollar could put the kibosh on exports, which have helped keep the economy afloat.

But as the presidential election campaign moves into high gear, Democrats who believe we're living through a remake of "The Grapes of Wrath" and Republicans who think it's all in Americans' heads should be aware of one thing: they're talking to people who live in two different worlds.

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow or MoneyShow.com.

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