With the latest report from the government showing the U.S. economy continuing to slow down, Dennis in California is getting a little nervous. What happens if the slowdown gets worse and can’t be reversed?
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What likely economic scenario would bring us to the "tipping point" where interventions would be unable to stop this downturn in the economy?
— Dennis M., Santa Cruz, Calif.
Whoa, Dennis. We're getting a little ahead of ourselves here.
The latest numbers from the government, released Friday, show the U.S. economy growing at a 1.6 percent annual rate between the beginning of July and the end of September — the slowest pace in three years. That’s down from 5.6 percent in the first quarter and 2.6 percent in the second quarter.
So that’s a pretty rapid slowdown, and the slumping housing industry is getting much of the blame. A two-year run of steady increases in short-term interest rates — which the Federal Reserve halted this summer — also threw some cold water on the economy.
But the current "downturn" in the U.S. economy at this point is a shift to slower growth — not "negative" growth (aka recession) — when the economy actually shrinks. Typically (though not always) a recession is defined as three consecutive quarters of negative growth. We're not there yet.
In fact, the recent slowdown has an important silver lining. Whenever an economy gets up a head of steam, there’s a risk that it starts growing too fast. Skilled labor and raw materials get harder to find — so the price of both goes up. If that wage or price inflation gets “baked in” to the economy — as it did in the 1970s — you can get an upward price spiral that’s extremely painful to correct. It’s a toss-up which is worse: a recession or an inflation spiral that destroys your savings and pushes interest rates to double digits. (Just ask anyone who was on a fixed income or shopping for a home in 1979.)
Of course, there are many forces that could push the current slowdown into an outright recession. Among the likeliest at this point would be a worsening of the housing slump, though the latest home sales numbers don’t seem to show that happening. If home prices fall, consumers could tighten their belts — or at least run out of fresh home equity to borrow against. Since consumer spending which accounts for about 70 percent of the U.S. economy, that could hurt.
Rising interest rates also would make matters worse. (If a business wanted to expand, it would have to pay more to borrow the money. Consumers would have to pay more to borrow and shop.) Though the folks at the Fed pull the levers on short-term rates, investors in the bond market determine long-term rates. And bond buyers hate inflation because it eats away at the value of their investment. So when inflation rises, they want to get paid a higher interest rate to make up for the inflation hit. Another surge in oil prices would add more fuel to the inflation fire, and the Fed folks say they’re already worried that inflation is running too high.
A falling dollar could have a similar effect: if you’re in Spain buying U.S. bonds with euros, a shrinking dollar clips the value of your investment when you bring it back home. And if our federal government's spending is not brought under control over the long term, bond buyers, worried about Uncle Sam’s finances, could well demand higher interest rates before they buy. We could also be headed for a painful period when the bills for Social Security and Medicare come due over the next few decades. Correcting these imbalances could take years or decades.
But there are no realistic scenarios we can think of that would create a "tipping point" that would set in motion an unstoppable down cycle. Economies, like markets, have a way of correcting themselves — by inflicting severe pain in the short term. (See: Japan.) The U.S. economy has suffered through several prolonged such periods: the Great Depression of the '30s and the Great Inflation of the '70s come to mind. Eventually, if the government doesn't screw things up, the economy gets back on track. Some people may be a lot poorer, but economic growth returns.
If you want to think like a Hollywood producer looking for the next summer disaster blockbuster, you could probably come up with a good scenario or two. Hyper-rapid global warming or nuclear terror attacks might get you there. Or maybe massive global famine or some killer virus that wipes out entire cities.
But your odds of dying while driving a car are much greater.
I want to get started in investing in a company. Can I buy one share of stock at first?
-- Name withheld, Austin, Tex.
You can, but it’s an expensive way to get started.
It’s theoretically possible to buy a share of stock in a private sale (or receive a share as a gift), but almost all stock sales are handled by a broker or dealer. The reason (aside from the fact that the brokers and dealers want to continue to make a living) is that they “make a market” in the particular stock you want to buy.
Bringing lots of buyers and sellers together (usually) gets you the best price — whether you’re buying or selling. It’s not much different than eBay. You could always advertise your signed photo of Roger Maris in your local paper, but listing on eBay will probably attract more buyers willing to pay a higher price.
In return for getting all these buyers and sellers together, both eBay and your stock broker charge a fee. In the case of stock brokers, you’ll need to open an account and then pay a commission for each trade. Since most brokers now charge by the trade — not per share —buying shares one at a time means you’ll pay that trading fee for each share. Some brokers also charge an “activity fee” — which means if you don’t trade a lot, you’ll have to pay to keep the account open. (Though many brokerages waive that fee for IRA and other tax-deferred savings accounts.)
So you’re probably better off saving up enough for 10 or 100 shares before you get started. Just beware of the “don’t put all your eggs in one basket” rule. That’s why many first-time investors start with a mutual fund, which spreads your money — and the risk of losing it —around a number of stocks.
When we purchased our home three years ago it was my wife's and my first time buying a home. We were very excited and you could say that we were wearing our rose-colored glasses the entire time. Although there were water stains on the basement walls, our home inspector thought they were old. … However, we learned quickly this wasn't true. … We are now looking into fixing this problem and feel especially cheated given the substantial cost of making the necessary repairs and the fact that the sellers certified there was no water problem. Do we have any recourse at this point?
-- Ben M., Michigan
Go back to the lawyer who represented you in the closing. A lot depends on the language in the certification made by the seller, the contract of sale and your state's laws regarding disclosure in real estate transactions.
Ultimately, your recourse is to sue the seller. But that can get expensive and you may not win.
But you may not have to go that far. A better outcome would be to negotiate an agreement with the seller to help with the cost of repairs. So before you get started, get a few estimates to find out just how much money you're talking about.
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