4 Things Propping Up the Slowing Economy

When economic growth slows, consumers tend to get a breather.

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A trader watches a television screen on the floor of the New York Stock Exchange, Wednesday morning May 9, 2007, as the Fed interest rate is announced. The Federal Reserve left a key interest rate unchanged at 5.25 percent as the economy signaled that it was on track for a soft landing in which growth slows enough to restrain inflation.
A trader watches a television screen on the floor of the New York Stock Exchange.

Here's an odd pattern that's developed during the last few years: The worse the economy gets, the stronger the forces pulling it up.

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For the fourth year in a row, the economy seems to be entering a disappointing spring slowdown following a couple quarters of robust growth. In prior years, the culprits were turmoil in the Middle East, the European debt crisis, the Japanese tsunami and the U.S. debt-ceiling smackdown. This time, austerity measures in Washington are taking the air out of the economy.

What we've learned from this seesaw pattern is that a slowdown itself generates positive economic forces that make it easier for consumers to get by, limiting the extent of the downturn. Here are four reasons why slowdowns have become self-limiting:

1. Oil and gas prices fall. When the global economy slows, demand for oil drops because people drive less and manufacturing declines. As a result, oil prices usually fall, with gasoline prices dropping alongside them. That's happening now. Crude prices started the year around $92 and went as high as $97, but have since dropped to about $88. Gas prices started the year around $3.37, spiked to $3.85 in late February and have since fallen back to about $3.60. They could have further to fall, with the government predicting that pump prices will average $3.39 in 2014. That would be the cheapest annual price since 2010.

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Cheap gas helps consumers in two ways. First, it puts a bit of extra money in their pocket they can spend on other things. Second, it makes them feel better, because the price of gas – advertised more prominently than that of any other consumer goods – has an outsized impact on consumer psyches. When the cost of filling your tank goes down, life is good, no matter what else is going on.

2. Interest rates fall. Wall Street analysts have been warning all year that long-term interest rates are likely to rise, which has prompted many investors to sell fixed-income securities paying relatively low rates of return. But a slowdown tends to bring down interest rates, especially if the stock market declines, as it has during the past week or so. When that happens, more people buy safe securities such as Treasury bonds, pushing rates down.

In early March, the interest rate on 10-year Treasuries – a benchmark for many other rates – hit a high for the year of 2.07 percent. It has since fallen to about 1.7 percent. That has brought down rates on mortgages, car loans and other types of debt, making it cheaper for consumers to buy high-ticket items. Savers earn less on money in the bank, but they also have the option of investing in stocks or other assets that might offer higher returns.

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3. The Fed keeps pumping money. The Federal Reserve has pledged to continue its easy-money policies as long as the economy remains weak, provided inflation remains low. So slowing growth suggests the Fed will extend policies that many economists credit with inflating stock prices and keeping interest rates much lower than they'd otherwise be.

4. Investors keep "buying the dip." Wall Street has conditioned investors to expect a stock-market correction that might last a couple of months, followed by a strengthening economy and a revived stock-market rally. For that reason, many investors want to take advantage of any drop in the market to "buy the dip" and get in at lower prices than they would if they waited till later in the year. Yet those dip buyers may actually be preventing the market from going lower, since they buy on signs of weakness, pushing stocks back up.

Obviously the economy could be stronger, but when consumers themselves step in to take advantage of weaknesses, it suggests better times are coming. When a few people think things are likely to get better, others eventually join them.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.