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Amid economic downturn, hints of better times emerge

The economy is still in the dumps, with unemployment rising and productivity slowing, but Friday brought signs that a reversal of fortune might be in the works. Oil prices continued to fall, the dollar got stronger and Wall Street celebrated.

"Things aren't quite as bleak as they appeared a month ago when oil was at $147'' a barrel, said Scott Brown, senior economist for Raymond James & Associates in St. Petersburg.

The news:

• Oil fell another $4 to $115 a barrel, a drop of more than 20 percent in less than a month. That was despite concerns about new pipeline sabotage in Turkey. The movement is a sign that speculators who drove up the price of oil and other commodities are now pulling back.

• The dollar rose sharply against the euro, which is losing favor because of weaker economic growth and rising inflation in Europe. "This is a fundamental rethink in the alignment between the major currencies, with the U.S. dollar coming out on top," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp.

• Stocks rose dramatically in response, with the Dow Jones Industrial Average jumping 302 points, a gain of 2.7 percent. Some commentators said money was flowing out of commodities and into stocks.

Here is a look at what it means:

How long will it take the drop in oil prices to show up at the pump?

It's already happening and there's more good news ahead. Gasoline peaked at $4.11 a gallon last month and is now down to $3.84. "We're probably going to see gasoline at the retail level around $3.50 for Labor Day," said James Cordier, president of Liberty Trading Group in Tampa.

Will the drop in oil prices be enough to get the U.S. economy back on track?

Not by itself, but it certainly will help. The housing mess won't go away overnight, with foreclosures still rising and lenders having to write off more bad loans. Fannie Mae, the largest U.S. buyer and backer of home loans, reported a big loss Friday. However, lower oil and gas prices will be a huge help in keeping inflation from getting out of line.

What caused oil prices to start going down?

Part of it was the dollar getting stronger, part of it was reduced demand as drivers cut back, and part of it was just a shift in the market. Speculators drove up the price of tech stocks, then real estate and then oil beyond anything that made sense. But when trades started going against them, they stampeded for the exits.

Why does the dollar suddenly look like a better bet than the euro?

As other economies slow, even a lackluster U.S. economy looks better by comparison. In addition, wage pressures are greater in Europe, making inflation a bigger threat. Central banks can't raise interest rates to fight inflation with the economy waning. "They're staring at more substantial stagflation," economist Brown said. Growth in emerging markets is also slowing.

Is there any downside to the stronger dollar?

Yes. Exports have been a bright spot for the U.S. economy as a weak dollar made it possible for foreign buyers to get more for their money. Now they face a price hike as the dollar strengthens. That, combined with weaker foreign economies, will reduce demand for U.S. goods overseas. The hope is that domestic demand will start improving before that happens.

Information from Times wires was used in this report. Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

Amid economic downturn, hints of better times emerge 08/08/08 [Last modified: Monday, August 11, 2008 12:09pm]

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