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Small news headlines reflect big economic problems

July 27, 2012

| MoneyRates.com Senior Financial Analyst, CFA

A forecast of rain and a bad earnings report for an automaker.

These may not be the kind of news items that get much play on the nightly news, or even on social media. However, each is an indicator of important economic trends playing out right now.

Sometimes a mosaic of small news items will define the economic landscape more accurately than any single event. In this case, the forecast of rain and bad earnings report happen to be typical parts of an emerging pattern -- one that doesn't bode well for the economy as a whole.

Cloudy weather

Given the drought conditions that have taken hold over much of the country this summer, a forecast of rain should be welcome. Unfortunately, though, in this case it may be too little too late.

Forecasted rain in the Midwest may save what's left of this year's corn crop, but by now not much of it may be healthy enough to be salvaged. The U.S. Department of Agriculture reported that the percentage of the corn crop characterized as being in good to excellent condition dropped to 26 percent, down from 31 percent just last week. 50 percent of that crop is now characterized as being poor or very poor, up from 38 percent last week.

The economic effect is that a poor crop decreases the food supply, which causes upward pressure on prices. Fragile economies are easily disrupted by inflation threats, and price increases are especially tough on consumers with holding in savings accounts and other deposits, given today's low interest rates.

Inflation had been easing in recent months, largely because of a decline in the price of oil. However, a rise in food prices could negate the decline in oil, and send general inflation rising again. As a final twist, the ethanol component of gasoline -- which was mandated to reduce U.S. exposure to volatile oil prices - is dependent upon corn production, and thus could push the overall price of fuel upward.

Slow-moving cars

Another telling piece of the economic mosaic came in the form of Ford's latest earnings report. The automaker reported its second-quarter profits were down 57 percent, despite good figures from North America. The problem? Slumping performance in Europe and Asia.

For months now, there have been warnings that slowing global growth could hurt the U.S. by depressing exports. Ford's sharp drop in earnings is a dramatic example of how this is happening.

This is more bad news for savings accounts, since a slow economy will help keep interest rates low. If inflation starts to rise because of higher food prices, this means savings accounts will be caught in a squeeze between low rates and high inflation.

While new headlines will soon bury this rain forecast and earnings setback, the key to understanding those new events may too lie in the stories that surround them.

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