What's Going Right With the Economy

If you follow the news, then surely you're aware that we're in the midst of an epic financial crisis. Perhaps the worst since the Great Depression of the 1930s. Or maybe the Panic of 1819 or even the Tulip Mania of 1637.

How bad is it? Well, never mind that the unemployment rate is a relatively healthy 5 percent, and gross domestic product growth, as far as anybody knows, has yet to tip into a recessionary swoon. If you ask consumers, there's disaster afoot. Consumer confidence is at its lowest level since 1987, and expectations of future economic conditions are at a 35-year low. In other words, the typical American believes we are headed for worse times than the mid-'70s or early '80s, when unemployment approached 10 percent, inflation hit double digits, and wage and price controls seemed like a good idea.

Of course, there's reason to be glum if the cost of driving your car skyrockets while the value of your home declines. But while rising gas prices and falling home values get the headlines, there are also a number of things going right in the economy, more or less—and preventing a real catastrophe. It might ruin a good pout, but here are a few important economic undercurrents that are generally positive:

The Main Street economy. It would be a stretch to say that Mom and Pop are thriving, but there's a big gap between gloomy conditions in the financial industry and the situation elsewhere in America. Many big problems like the subprime meltdown, the Bear Stearns collapse, and the billion-dollar write-offs at major banks have been occurring in the backyard of East Coast media establishments and, not surprisingly, dominating headlines. But much of the nation is tuning that out. "It's a depression on Wall Street, but it sure isn't on Main Street," Ken Griffin, CEO of financial firm Citadel Investment Group, said at an April conference in Los Angeles sponsored by the Milken Institute.

By some estimates, employment in the financial industry could fall by 20 percent or more over coming months—a genuine rout. But that will affect many people who are far wealthier to start with than the average worker, and there's little reason to think such carnage will spread to other sectors. In between the East and West Coasts, by contrast, many communities are thriving. "Some of these towns are very, very busy," said University of Chicago economist Gary Becker at the Milken conference, pointing to surging exports of U.S.-made goods as one reason.

A manufacturing boom. It's become conventional wisdom that we don't build anything in America anymore—and, wouldn't you know, the CW is wrong. Thanks largely to the weak dollar, once high-priced American labor is now a bargain, at least compared with Europe, making U.S. goods cheaper overseas and American firms more competitive. Exports of American-made goods have soared by about 23 percent so far this year, according to a recent Merrill Lynch report. That's a big boost to industries such as aircraft, ships, farm equipment, paperboard, and chemicals. U.S. companies with prominent overseas operations like Caterpillar, John Deere, IBM, and McDonald's have all been posting strong results. Collateral benefits include a falling U.S. trade deficit, rising foreign investment in American companies, and more jobs in those industries. And Merrill predicts that this "manufacturing renaissance" is just beginning and will last awhile.

Agflation. When oil prices skyrocket, the biggest beneficiaries are the countries that produce crude. Same with food—and America is still the world's breadbasket. Rising prices for corn, grain, dairy, and other foodstuffs led to a 50 percent surge in U.S. farm income in 2007, with more gains likely this year. Growth is so robust, says Jordan Kimmel of investing firm Magnet Investment Group, that "it's like the new Internet. The Farm Belt is just going bonkers." His firm foresees strong long-term prospects for companies that specialize in everything related to farming: growing food, fertilizing it, shipping it, and exporting agricultural expertise to China, India, and other countries.

Low prices. Not in gas or food, that's for sure. But while consumers have been fretting over $4 gas and $5 milk, other goods have continued to get cheaper, keeping the overall inflation rate at a moderate 4 percent or so. The price of cars has fallen about 1 percent over the past year, toys are down 5 percent, and TVs are down 19 percent. You won't see headlines about any of that, but smaller numbers on one side of the family ledger help offset bigger numbers on the other. Oh, and those plummeting house prices that are driving millions of subprime buyers toward foreclosure? Well, they're also making homes more affordable for buyers with the income and down payment to actually afford a house. And better affordability of homes is essential for buyers to emerge, a huge glut of unsold homes to diminish, and the housing bust to end.

Money on the sidelines. Lots of investors, big and small, have pulled their money out of stocks and risky securities and parked it in more-conservative treasury bills or low-yielding funds. But once the worst of the downturn seems to be over—think late this year or early next year, to be safe— investors desperate for higher returns will start taking more risks. That ought to ease the credit crunch and revitalize financial markets that have dried up. There will be hiccups and false starts before that happens, each no doubt the last desperate sign that the U.S. economy is about to tumble into the abyss—or perk up.