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Goldilocks and the Bears

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At first glance, the economy's role in this year's midterm elections is a puzzle. Economic growth and unemployment are at levels that in past years would have been a clear political asset for the party in power.

While the DOW Jones average is almost at an all time high, it only measures the health of 30 US companies.

"The run-up to this point has been driven by an expectation that the Fed will stop raising rates and get the cooling in the economy they're looking for," said Joseph Battipaglia, chief market strategist at Ryan Beck.

"The price you're paying for that is uncertainty about how much softening there will be in the economy. A soft landing is something that the Fed cannot engineer. It's out of their hands."

Fears of a slowdown in manufacturing affected Caterpillar, which sank 4.1 per cent to $62.77 - the week's worst performance in the Dow. United Technologies also suffered, losing 3.6 per cent to $62.30. Executives at Lowes and Home Depot are also worried.

And they have reason to be worried: A cooling housing market helped slow U.S. economic growth more steeply than expected in the second quarter, the government reported on Thursday, while corporate profits grew feebly. Analysts said a slowdown in the pace of expansion could extend into 2007 and Federal Reserve policy-makers caution they expect economic growth in the second half to drop below long-term trend rates.

Gross domestic product or GDP that gauges total economic activity within U.S. borders advanced at a revised 2.6 percent annual rate in the second quarter, down from the 2.9 percent estimated a month ago.

That was less than half the first quarter's 5.6 percent rate.

Wall Street economists surveyed by Reuters had expected second-quarter GDP to be unchanged at 2.9 percent. But the Commerce Department said inventory building was weaker than first thought and imports of services - which detract from domestic output -- were higher.

Yesterday, the Commerce Department said durable goods orders unexpectedly fell in August, signaling companies might be scaling back investment plans as the economy slows.

The 0.5 percent drop followed a 2.7 percent drop in July, the first back-to-back decreases since April-May 2004.

The Commerce Department also said sales of new homes were down 17.4 percent compared with August 2005, and the median price of $237,000 last month fell below the median of $240,100 in the same month last year.

About 44 percent of home builders have reduced prices, says Gopal Ahluwalia, director of research at the National Association of Home Builders, citing a survey he conducted this month. More than half of builders are offering free upgrades, up from 37 percent a year earlier, he said. The average house sold in the US last month for less than it had a year earlier. The 1.7 per cent fall in median house prices was the first fall in a decade and the worst annual fall in housing prices since November 1990, in the wake of Saddam Hussein's invasion of Kuwait.

What about the fact that average income is growing? That's true enough, but misleading. Average income increased overall solely because incomes at the very top exploded. For 80 percent of workers, incomes actually declined on an inflation-adjusted basis since November 2001. The Center on Budget and Policy Priorities notes this is the only time income for most workers declined during any four-year-long economic recovery, going back 40 years.

Go one layer down in the statistics, the answer is even clearer. Flat wages and rising debt nationally have converged to leave millions of middle-class households feeling acutely vulnerable to bumps in their financial planning. The most visible of these are rising energy prices and a softening housing market.

Just like the federal government has overspent since the Bush administration took office, going from a 200 billion surplus to a 300 billion deficit, Americans have been tempted by cheap credit and have overextended themselves. As a result, the National Debt has continued to increase an average of $1.93 billion per day since September 30, 2005.

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Travel website: The Pink Agenda. Several Blogs. Weekly newsletter, available upon request. Publications - Fiction: Borrowing Time: A Latino Sexual Odyssey - Floricanto Press 2003. Poetry: The Refined Savage Poetry Review - Refined Savage (more...)
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