Monday, September 21, 2009

Dealing With the New "Slacker" Economy

Posted By on Mon, Sep 21, 2009 at 11:43 PM

The Wall Street Journal has published a first-rate piece on Bend's economic debacle, using it as a microcosm for what's going on nationally.

The story (pretty long, but well worth reading) begins by describing anecdotally how the collapse of Bend's economy has created "slack" - a gap between the economy's productive capacity and what's actually being used:

"A year and a half of recession has left local manufacturer Bright Wood Corp. with too much capacity at its plants that make window and door components. Bright Wood has laid off nearly half of its work force, shut an 80,000-square-foot factory in Bend, and sold or stored its extra equipment.

"Additional underutilized industrial space, housing and workers are apparent across town. More than 9,000 people have lost jobs since mid-2006. Some 29% of homes are vacant. 'For Lease' signs hang on store windows near the town's main drag, Wall Street.

"Similar slack ... is evident across the U.S. Thousands of airplanes and hundreds of thousands of train cars sit unused, hotels report their highest vacancy rates in at least two decades, and millions of Americans are underemployed."

Calculating the degree of slack in the economy is important to the Federal Reserve Board, the WSJ explains, because it needs to steer a delicate course between pumping too much money into the economy (and thus igniting inflation) and not pumping enough (which could stifle recovery and even lead to a disastrous deflationary spiral).

With the amount of slack in the national economy, the Journal says, the inflation risk appears small. Unneeded, surplus productive capacity means employers lay off workers and close plants, and that keeps wages (and prices) low. However, "some Fed officials have been arguing for months that the central bank is putting too much weight on this argument and risks being behind the curve in combating inflation."

In Bend, at least, the prospect of inflation seems like the a very remote worry. Unemployment is at record levels, the housing market is still glutted, and banks aren't handing out a lot of loans.

"At the Bank of the Cascades - Bend's largest locally based bank, with $2.4 billion in assets - total loans and leases are down 14% from a year ago," the Journal writes. "Its holdings of government securities and debt issued by government-backed lenders Fannie Mae and Freddie Mac are rising. In August, the Federal Deposit Insurance Corp. ordered Bank of the Cascades to improve its capital and liquidity, an indication the bank won't be flooding the local economy with cash anytime soon."

At another local lending institution, High Desert Bank, President and CEO Larry Snyder says customers aren't coming in asking for loans. "'The dentist office that's thinking of expanding and adding another dental chair is holding off,' he says.

"From groceries to home prices to wages, costs haven't shown any hints of rising. And inflation? 'I don't see it on the horizon whatsoever,' Mr. Snyder says."

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