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Economy: Slump creating pent-up demand

By Charles Swenson
Coastal Observer

A survey of business conditions in the Carolinas by the Federal Reserve Bank of Charlotte last month shows confidence that conditions will improve, but lowered expectations for that improvement.

“The apparent slowdown has also impacted respondents’ expectations for activity six months out,” according to the survey.

Claude Lilly, chairman of the seven-member Fed board in Charlotte, said concerns in the Carolinas mirror those of members of the Georgetown County Economic Development Alliance who came to hear him speak this week. Taxes. Government spending. Regulation. Unemployment.

“There’s a fear of instability that is pervasive in this country,” Lilly said. “That is true at both the individual and institutional levels.”

That’s his opinion, not that of the Fed, he pointed out.

Since he spoke for himself and not the bank, he offered a personal example of how the economic downturn has produced a pent-up demand in the economy.

“My best investment is a house we have never bought,” Lilly said.

He is dean of the college of business and behavioral sciences at Clemson University. He and his wife wanted to buy a house on nearby Lake Keowee.

It was listed for $1.4 million. They offered $900,000. The seller scoffed.

When the house was reduced to $900,000, Lilly offered $700,000.

“This market is not going to come back anytime soon,” he said.

Lilly believes they’ll buy the house eventually. But now there’s another factor in play in his household economy.

“We saved so much money not buying a house we are thinking about buying two new cars,” he said. (They always replace cars every three years; always pay cash.)

It’s that cash on the sidelines that will revive the economy, Lilly told the development alliance members.

In the U.S. economy, trillions of dollars are on the sidelines. “It’s not that we don’t have cash,” Lilly said. “Any sign of strengthening will bring that money into play.”

But he doesn’t foresee a return to business as usual or hold much hope that new regulation, which he supports, will prevent future boom-bust cycles.

“Baby boomers have gone through an emotional roller-coaster from which I don’t think they will recover,” Lilly said.

In another anecdote, he said talking with a group of wealthy, but aging, boomers in Greenville confirmed that they aren’t willing to take risks because they aren’t sure they can recover financially from a mistake.

“What do you do with your money if you don’t take financial risk?” he asked.

The 15-to-44 age group is the one that does most of the spending, but it’s also shrinking. That will challenge the economy, he said.

Lilly sees some bright spots, “little green shoots that will give us hope.” A rise in interest rates by the Fed would provide a psychological boost, but he doesn’t expect that until late 2011.

“The only way to get this economy going again is if people spend money,” he said.

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