Sunday, October 12, 2008

A 1 Percent Change

Gasoline prices are falling here in Pennsylvania. At this rate, they might be below $3 a gallon by next weekend. People are happy about this, and one of my friends told me, “It’s a good time to take a road trip.”

But no one I know is taking a road trip beyond the traditional weekend at Grandma’s house.

If you went to the mall in King of Prussia yesterday, you would think boom times never left. You would have to really like crowds to approach Starbucks or the Apple Store.

But retailers, including Starbucks, say that sales totals continue to be disappointing, perhaps even a little lower than last year. And go into one of the high-end department stores, or a few miles down the road at Target or Circuit City, and the place is so quiet you might feel like you should ask whether the store is open.

The difference between boom times and depression are so stark in national economic terms that you would think they are the result of drastic changes in behavior, but they aren’t. It only takes small changes in the way people perceive their financial options and make decisions to make major changes in the economy.

In recent years, the U.S. economy has wavered mostly between 1 percent and 2 percent growth rates. At 1 percent growth, the economy is faltering, unemployment is rising, it’s hard to get a raise, businesses postpone major investments — that’s a painful state for the economy to be in. At 2 percent growth, the economy is basically working. More people are finding jobs, and workers can expect to get a pay raise that keeps up with inflation. Businesses can modernize and invest for the future. And if we could get to 3 percent growth, that would be a boom time, when businesses would try to accelerate their plans and would be offering raises so their best workers wouldn’t leave.

That gives you an idea how much a 1 percent change affects the economy as a whole. And a 1 percent change in the whole economy could, in theory, occur just from every single person making a 1 percent change in their economic behavior.

But some of your economic behavior can change by 10 percent or more before you even notice you are doing anything different. When I heard, “It’s a good time to take a road trip,” that’s when it occurred to me: no one has been taking road trips. That used to be a regular part of life, but sometime around June, it seemed like everyone stopped doing it. Obviously, we were discouraged by the high cost of driving, but I’m not sure it was a conscious decision on anyone’s part. It’s more like life is busy and everyone just forgot.

I know a few people who are political organizers, and in the middle of everything else they are doing this fall, they never got around to buying any new fall clothes. They were busy doing other things, and perhaps the mild September weather didn’t remind them that it was the fall clothing season. To them, it’s a minor omission that goes almost unnoticed. Skipping a season also means that their clothing purchases for the year will be about 25 percent less than usual.

If enough people are just forgetting to spend money in this kind of way, it’s enough to drag down the economic aggregates.

Or, think of it this way. If you are feeling just the slightest bit cautious, you might go to the mall 5 percent less often, go into 5 percent fewer stores while you are there, and spend 5 percent less on average in each store. You may not be able to tell that you are doing anything different. After all, you are still doing all the things you expect to do. Yet you are spending 14 percent less.

It is the same in business. Feeling just a hint of budget pressure, managers may go ahead and interview for all their open positions, yet end up hiring only half as many people, leaving some positions vacant. “Those weren’t the ideal candidates we were hoping for,” they may say, yet it is really the possibility of budget trouble that makes them hesitate.

This is the kind of thing we’re seeing across the economy now. In a growing economy, the hesitation in some areas would be balanced out by enthusiasm in other areas. The areas that are suddenly growing now — natural food, electric cars, insulation, alternative energy, espionage, hurricane recovery, political advertising, and so on — are not nearly large enough to carry the economy as banking, construction, real estate, personal services, health care, restaurants, fuel-burning cars, consumer products, movies, and other areas falter. The growth we are looking for will come soon enough, as more business adjust to provide the things that people are willing to buy now.