Credit Crisis May Be Easing, But Fuel, Food Prices Add New Risks to Economy
The worst of the U.S. credit crisis may have passed without causing a meltdown of the financial system. But, thanks largely to rising fuel and food prices, the economy is not out of the woods yet, experts say.
"We all hope the worst is over," said Amiyatosh Purnanandam, an assistant professor of finance at the University of Michigan. "I am not sure, though.”
Purnanandam said it will be “another quarter or so” before it is clear whether things like the federal economic stimulus package and the apparent stabilization of the banking sector will be able to overcome negative factors, such as high fuel prices and food inflation.
Purnanandam, whose work focuses on risk-management, securities, investments, credit risk pricing and banking, said Michigan still has a rougher economic road to travel than the rest of the country. He attributes that to the state’s continued reliance on the automotive industry, which faces challenges during an era of high gas prices and slow economic growth.
Not Entirely Gloomy
Purnanandam said some other states hit hard by foreclosures and falling home values – such as California and New York – will have an easier time recovering because their economies are more diverse and better able to create new jobs.
On the upside, Purnanandam said, the banking sector “seems to be getting back on track” nationally, which is good news to creditworthy businesses looking for loans to expand. That, he said, could be the first sign that things are getting better.
Another silver lining is that, while dependence on the auto business is likely be a drag on the Michigan economy, that dependence is not as great as it once was. Dana Johnson, chief economist at Comerica Bank said people used to talk about Michigan getting pneumonia when America caught a cold. That was because our auto-intensive economy has been extremely sensitive to cyclical downturns. But things are changing.
"Now that the auto sector has shrunk so much," Johnson said, "it's more the case that when America gets a cold, Michigan gets a cold."
Johnson said Michigan is "in the later stage of structural weakness," thanks to a lot of restructuring done by companies here. But, now the state – along with the rest of the country – is experiencing a cyclical downturn. That really hurts, Johnson said, because it comes on top of the pain Michigan has already experienced. But the good news is that Michigan is in a better position to recover along with the rest of the nation.
Comerica Bank reported last week that its Michigan Business Activity Index was unchanged in March at 101. In the first three months of 2008, the index was down less than one point from the fourth-quarter 2007 average and is about 3 points lower than the average for the third quarter of 2007.
The National Picture
In an interview with The Associated Press last week, Treasury Secretary Henry Paulson said the turmoil that gripped Wall Street and that took a turn for the worse again in March has eased somewhat.
"There's progress," Paulson told the AP. "I think we're closer to the end of this" than to the beginning.
With oil costs surging to record levels and gasoline prices hovering around all-time highs above $3.60 a gallon, Paulson acknowledged that pain at the pump would diminish the impact of the federal government’s $168 billion stimulus package of tax rebates, which were designed to give the economy a jump-start. The first batch of rebate payments started hitting bank accounts last week through direct deposits.
"Obviously, the high price of gasoline is unwelcome and is a challenge and is a headwind," Paulson said.
According to the Reuters news agency, similar views were expressed last week by former Federal Reserve Chairman Alan Greenspan.
Greenspan said the worst of the credit crisis is over, Reuters reported, citing sources who attended Greenspan’s Thursday speech before the Alternative Public Strategies Conference in New York. Greenspan also said U.S. house prices are unlikely to stabilize by year-end, Reuters reported.
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The worst of the U.S. credit crisis may have passed without causing a meltdown of the financial system. But, thanks largely to rising fuel and food prices, the economy is not out of the woods yet, experts say. 
