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2009: A Rough Start
But a Better Finish
PREVIOUS ISSUES
The odds of a recession are rising rapidly. A monthly survey of manufacturing purchasing managers released Oct. 1 shows a plunge in production and, more ominously, in new orders. Meanwhile, a halt in the sale of commercial paper --short-term financing for many corporations -- the last 10 days of September and Congress' initial rejection of the Treasury-engineered rescue plan convince us that a recession is now likely in the coming months, no matter what lawmakers do in the next few days.
Businesses, already showing signs of caution, are finding it tougher to borrow money for long-term needs and more expensive to borrow for basic short-term needs, such as inventory and payrolls. That will result in rising layoffs, and there will be no help to gross domestic product (GDP) from business investment.
Consumer spending, which totals two-thirds of GDP, is already contracting. It shrank after adjusting for inflation in the quarter just ended. And Wall Street's volatility is hurting consumer confidence. Meanwhile, there are signs that exports, which have been contributing to GDP growth, are flagging.
The popular but unofficial definition of a recession is two straight quarters of negative growth. The quarter just ended will be close to zero while the current quarter will be in negative territory. It's even possible that the business cycle dating committee at the National Bureau of Economic Research, which decides when recessions start and end based on a range of economic indicators, will look back and see that the economy teetered into recession as early as July, two months before Congress was begged to pass a $700-billion plan to get the credit markets functioning again.
The first quarter of 2009 is likely to be negative, too, even if the Treasury rescue plan quickly clears Congress and the government launches a massive buyback of mortgages and mortgage-backed securities.
There are reasons to believe this recession won't be as long or as deep as the downturns of the 1970s and early 1980s. Oil prices have dropped a third since they hit close to $150 a barrel in July. Interest rates remain relatively low, and sooner rather than later, the Federal Reserve will cut a key short-term rate, which would lower bank prime rates and home equity lines of credit.
Many industries outside of financial services are doing well, and conditions and attitudes can change quickly. The Conference Board's monthly survey of consumer confidence (taken before the House rejected the Treasury plan on Sept. 29) picked up a bit in September in reaction to falling gas prices. The government plan will be a huge step in restoring investor and consumer confidence to create conditions that persuade banks to lend and consumers and businesses to borrow.
Private investors are sitting on billions in cash, waiting to grab assets: Stocks, bonds and real estate at the first sign of stability in the markets. Last, the unemployment rate, most recently at 6.1% in August, remains historically low, although it will rise during 2009 to about 7% by year-end. That's high, but well below the 10.8% peak of the 1982 recession.
Once housing begins to rebound, its drag on employment and consumer spending will lessen. Our outlook is for housing starts to bottom in the first half and for home prices to continue to drop in 2009, though at a slower rate than they have this year, which will deliver relief to credit markets.
What the economy needs now is time, something that for all their skills can't be manufactured by Treasury Sec. Henry Paulson and Federal Reserve Chairman Ben Bernanke. But their $700-billion rescue package will give credit markets an opportunity to stabilize as the government separates the bad debt from the perfectly fine, performing mortgages.
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POSTED BY: Nomen (October 02, 2008 09:41 AM)
It's interesting that lower oil prices are touted as helping us get out of this crisis but Congress has done little in the past year to help lower those costs. It's also interesting that tight credit is now being used to hold the economy hostage until the big boys get their bailout money. The average taxpayer is being robbed and Congress is driving the getaway car. I don't see any chance of meaningful change no matter who gets elected this fall. Maybe global warming will be a blessing to those of us who can't pay the heating bill this winter.
POSTED BY: Jerry (October 03, 2008 03:23 PM)
Doom and gloom is all that is out there. There is an old adage, "Bad businesses fail, good businesses grow because bad businesses fail". Why are we so afraid to admit that we have a culture of "bad businesses"? Why do we insist on propping up bad businesses? When we insist on running a company for the benefit of the top management people and the stockholders we are a bad businesses! Companies succeed when the customer is the most important person in their life, management and stockholders will benefit when they acknowledge who is the most important person to their company, this is good business.
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