A few weeks ago I discussed this in a Hub entitled Recession: what is it and how did we get there. As the situation has changed somewhat, I'm happy to update it.

The bad news is bugled everywhere. The U.S. is in a massive recession, the worst since the Great Depression. House prices around the nation are in freefall. Industrial production is plummeting. Unemployment is rising. The dollar is falling against every currency out there.

As a friend of mine likes to say, it's enough to make you run with scissors.

But what's the real picture? Let's take a look at some data and misconceptions, and try to sort this out.

This is the worst economic situation since the Great Depression. This little minor downturn isn't even in the same order of magnitude as the Great Depression of 1929-1933, when the U.S. economy as measured by gross domestic product shrank by 30% and unemployment surged to 25%. To put this in perspective, consider that when annual U.S. gross domestic product (GDP) growth turned negative in 1974 it was only by -0.50%, 1975 (-0.20%), 1980 (-0.2%), 1982 (-1.9%), and 1991 (-0.2%).

So what does that mean in real life? During the Great Depression, the U.S. economy shrank in massive doses. Businesses and factories laid off workers, cut production, finally shut their doors and gates because there was no market for their goods and services. Each year the Depression lasted, the economy as a whole shrank further: -8.6% in 1930, -6.4% in 1931, -13.0% in 1932, -1.3% in 1933. These are horrifying figures. To put this in personal terms, imagine you had to take a 30% reduction in pay over a period of four years. Would your way of life be affected? You'd better believe it.

Now let's look at the 1970s. In 1974 and 1975 combined, the U.S. economy shrank by -0.7%. Inflation ran at 9-10%, unemployment spiked to 8.7%, the Federal funds rate approached 13%, and the so-called "misery index" was announced every night on the TV news. Is this bad? Yes. Is it horrifying in the sense of the Great Depression? Nowhere near.

Now let's look at our current economic picture. In the first quarter of this year, the economy as measured by GDP growth has been finalized at +1.0% from an initial estimate of +0.6%. Inflation is around 4%, unemployment is 5.5%, and reporters and investors are calling this the worst since the Great Depression?

Investors and the media need to get real and quit exaggerating.

Housing prices are in freefall. According to the Case-Schiller Home Price Index for April 2008, the most recent release to date (as of 2 July 2008), home prices in Las Vegas, Los Angeles, Miami, Phoenix, San Diego, San Francisco, and Tampa have all fallen by over 20% since April 2007. Is this bad? Yes. Is it surprising? Not for anyone who's been paying attention. These areas have been experiencing a housing "bubble," where prices rose without any basis for the increased price in the actual value of the asset in question. Crude oil is doing something very similar right now. Technological stocks did it during the 1990s only to explode in the dotcom recession. The most famous example is the tulip mania in the 1630s, where a single bulb could fetch six or seven times a worker's annual salary. It's nothing new or exceptional, but it hurts when the mania, and the value of people's assets, collapse in consequence.

To put these house prices in perspective, take a look at Housing Tracker. This is a table that compares what percentage of a family's income is required to purchase a house in various cities around the nation. Worst on the list is Los Angeles, where the mortgage payment for a typical single-family home requires 63.5% of the median monthly income. A close second is San Francisco at 58.2%. Las Vegas is at 30% (not too bad), Miami 46.8%, and San Diego 51.8%. Compare that with Houston at 16.6%, Atlanta 15.9%, and the champion of the list, Detroit at 11.4%.

When 63.5% of a family's monthly income is required just to make the mortgage payment, there's not a lot of discretionary income nor is there a financial cushion should there be a shock to the economy. With gasoline rising toward $5 per gallon, well, something had to go, and for a lot of people, what went was the house. After the value of the home fell by roughly 25%, there wasn't a lot of sense in continuing to make mortgage payments in any case. Keep in mind that fully a quarter of all the foreclosures currently taking place are against "house flippers," who purchased a house intending to slap a coat of paint on it, maybe plant a few flowers in the yard, then resell it for a hefty profit. With an inventory of houses for sale that should last the better part of 2008 and more than halfway through 2009 even if nobody else joins the list, a lot of them wound up being stuck with houses they couldn't flip and the lender stepped in.

All that being said, the Case-Schiller Index is a flawed measurement. It only measures the difference between reported sales prices of homes that have been sold more than once in a given period of time, and only in certain cities around the nation. It only records sales of single-family detached homes, so if there really is a flight of suburban employees back into the city proper, Case-Schiller only records the home that's out in the burbs waiting to be sold and not the purchase of the condo or townhouse in town. (However, no other statistics I've seen seem to be reflecting such a trend, either.)

Interestingly, Houston, the fourth-largest city by population and with a sound and still thriving housing market, is not one of those cities measured by Case-Schiller. This is despite the fact that the population of Texas is growing faster than 47 other states in the union, behind only Florida and Arizona. The demographics of the United States are shifting, with the median center of population moving south and west by several hundred miles per year as people move out of densely-populated Northeastern and Rustbelt states for warmer (and less tax-burdened) climates. The states that are losing population (read tax revenue and political clout) include Connecticut, Pennsylvania, Michigan, Massachusetts, Ohio, Louisiana (due to Hurricane Katrina), New Jersey, Illinois, California (interesting fact, that one), and New York. That's in descending order of population loss, by the way, which means people are leaving California and New York in droves. (Although you might not be able to tell by the traffic congestion.)

After the 2000 census, New York and Pennsylvania each lost two seats in the House of Representatives. After the 1990 census, New York lost three and Pennsylvania lost two. Other states losing seats during these years include Ohio, Illinois, Michigan, Massachusetts, New Jersey, Connecticut, and Indiana. They're forecast to lose even more following the 2010 census. And this time, so is California, for the first time in a long time. This population shift will also effect electoral college votes, by the way.

So let's put all this together. People are moving out of many of the cities on the Case-Schiller House Price Index list, including Los Angeles, New York City, San Diego, San Francisco, Cleveland, and Boston. Their houses are staying behind, and they're buying new homes in southern and western states that aren't as well represented on the Case-Schiller Index, such as Texas, South Carolina, Tennessee, and Wyoming, where there never was a housing bubble to burst and where it costs a smaller percentage of the family's monthly income to purchase a probably larger home. You'd better believe the Case-Schiller is reporting a housing market collapse--but it's only telling a small part of the whole story.

Not only people are moving to different parts of the country; so are jobs. Between 1996 and 2006, jobs growth was strongest in Nevada, Arizona, Idaho, Florida, Utah, Wyoming, Texas, New Mexico, Colorado, and Montana. It was weakest in Michigan, Louisiana (Katrina again), Ohio, Illinois, Indiana, Mississippi, Connecticut, Massachusetts, Missouri, West Virginia, Pennsylvania, and New York.

When Wyoming state development officials realized they had more jobs than people to fill them, they advertised in Michigan, which was the only state in the union to actually have negative jobs growth in those ten years.

Industrial production is plummeting. This is blatantly not true.

One of the most respected economic indicators is the Institute for Supply Management (ISM) index. This is a monthly survey of professionals in the manufacturing sector, designed to calculate whether this field is experiencing expansion, contraction, or merely holding its own. The data are compiled on national as well as regional levels, and the measurement is reported on a scale of 1 to 100, with 50 being the break-even point, anything below that level indicating contraction, and anything above it indicating expansion. The further from that break-even 50 the number becomes, the stronger it gets, with 40 being a horrifying result and 60 exhilerating.

For much of 2008, the ISM Index registered contraction, falling to 48.3 in February and rising slowly to 49.6 in May. But something funny happened in June: the ISM rose to 50.2, signaling that the manufacturing sector is no longer contracting.

ISM also measures non-manufacturing (service-related fields) data, and the picture there is the same. In January the non-manufacturing index fell to 44.6, which is where a lot of people began talking recession. But in February it rose to 49.3, and continued rising to cross back to 52.0 in April and 51.7 in May. The June data hasn't been released as of this date (2 July).

To be fair, the regional readings are spottier, with Boston reporting 41.4 and Detroit at 46.6, while Western Washington state reports 58.6 and Houston at 60.6. Most of the other regional readings are hovering either just below or just above the break-even 50, including Austin at 49.5, Buffalo at 52.6, Chicago at 49.1, Georgia at 48.8, and New York City at 50.4.

That doesn't sound as if industrial production is plummeting to me.

Unemployment is rising. The national unemployment level as measured by the U.S. Department of Labor rose from 5.0% of the available workforce in April to 5.5% in May. That is an ugly jump, and it's forecast to rise even higher, to 6.0%, by the end of 2008.

Again, to put this in perspective, it's not all that bad. In past recessions the unemployment rate rose much higher, including 1975 (8.5%), 1976 (7.7%), 1982 (9.7%), 1983 (9.6%), and 1992 (7.5%). Of course, this is not consoling to those people who have lost their jobs and are facing the loss of their homes, their cars, and other assets purchased on time payments.

The dollar is falling. The value of a nation's currency, as set by the foreign exchange (forex) trading market, is a complicated subject and deserves a Hub of its own. For now, just understand that many factors go into determining a currency's value, including the state of its economy, its level of governmental debt or surplus, how it earns money on the world market (commodity or manufactured goods exports, providing services worldwide, going door to door with an empty bowl), and--one of the most important factors--the "official" interest rate, which determines the national money supply and influences the level of foreign and domestic investment within that country. Again, that's a complicated subject and I won't go into a lot of detail here.

To stimulate the U.S. economy, the Federal Reserve Chairman, Ben Bernanke, slashed the official rate from 5.25% in September 2007 to 2.00% currently. That's a huge reduction, and it's made investing in the U.S. not the most attractive option for big money holders. After all, they can earn 8.25% in New Zealand (although that will start to decrease later this year), 7.25% in Australia, and 5.00% in the U.K. Of course, they'll get only 0.50% in Japan, which is as awful as it gets.

To put this in real perspective, the U.S. is now a favorite funding currency for investors who dabble in what's called the carry trade, where money is borrowed in a country with a low interest rate and then invested in one with a higher rate. For those investors who are currently scared of the fluctuating stock market but don't trust the commodities bubble, they borrow money at 2.00% in the U.S. and invest it in Australia at 7.25%, earning 5.25%. (The danger in this maneuver is that volatile exchange rates could eat away their profits, which happened big time last year in July when the subprime crisis hit. I've inserted a chart below of the exchange rate between the Australian dollar and the Japanese yen, and that big red drop in the middle is money running out of investors' wallets.) This puts further downward pressure on the value of the U.S. dollar.

Remember, most commodities are priced in U.S. dollars, including crude oil. When the value of the dollar goes down, the price of commodities will rise to compensate. It's estimated that around $25 per barrel of that record crude oil price is due to the low dollar.

So, is the U.S. dollar declining in value against other currencies around the world? Against the major ones and even some of the minor ones, yes. Will this continue? No, not for long. IMHO, it's pretty near the bottom and should start rising in value around September or October. It may strengthen even sooner if Bernanke, President Jean-Claude Trichet of the European Central Bank, and Governor Mervyn King of the Bank of England get really sick of high commodities prices and decide to raise the value of the dollar by intervening in the forex market. It's been done before, not only for the dollar but also for the Euro and other currencies, although the strategy is not always effective.

Okay, everybody, that's my July 2008 update on the U.S. economic scenario. Feel free to ask questions and I'll answer as best I can. And thanks, renigma, for making the request.