Mike Conlon
Senior Instructor
instructor@mywealth.com
Yesterday’s claim that the Great Recession in the United States may be over is nothing more than an exercise in semantics. While it may be technically true, as a recession is commonly defined as “a decline in Gross Domestic Product (GDP) for two or more consecutive quarters, until we actually see positive GDP growth and not “less negative”, I for one will not be breaking out the party hats just yet.
The last GDP report showed that in the second quarter GDP declined at a rate of 1%. Compared to the 6.4% decline we saw in the first quarter this seems pretty good. While many economists will point to this figure as a sign that the economy is stabilizing, I’m not so certain that this uptick is the start of a new trend that will put us on the path to recovery or just a pause in what clearly is a downtrend.
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There are many factors out there which do not bode well for a quick recovery and Bernanke et al. are in a difficult position as they have to pick their poison so to speak. Here are a few areas that could rain on the recovery parade.
1. Unemployment. Perhaps the single greatest factor and impediment to recovery is the fact that unemployment is still rising (albeit at a slower pace) and that Bernanke himself has anticipated a prolonged period of high unemployment, to exceed 10% by next year. Since the consumer represents some 70% of GDP, their lack of purchasing power could stall sales going forward. And while retail sales figures rose the most in 3 years, much of that can be attributed to the Cash for Clunkers and other rebate programs, which have or are due to expire by year end.
2. Real Estate, particularly commercial, defaults are still occurring and while the government backstop has allowed the banks to absorb some these losses, the lack of buyers or renters could cause this problem to rise. This would put a glut of whole new properties on the market and further depress prices.
3. Banks still aren’t lending. Even though inflation appears to be tame (for now), and we are still at record low interest rates, banks are using this opportunity to shore up their balance sheets and tightened lending standards to the point that the only people who can get loans are the ones who don’t need them.
4. Future inflation. While there is no doubt that the Fed is praying that we see some inflation, we just might be so underwater that it may take a very long time for asset prices to return to previous levels. The key is going to be how Bernanke is going to be able to balance the scales of asset price deflation and commodity inflation.
5. Consumer amnesia. It won’t be long before the banks do start lending again and will be interesting to see how many consumers bite. Right now, like the banks, the consumer is attempting to shore up his/her personal balance sheet and has been saving more than consuming. I’ve actually heard people say things like, “I can’t afford that right now” and “maybe I don’t need to buy this”. If consumers are hesitant to get back into the housing market or are afraid to buy cars or other big ticket items, will commodity inflation force Bernanke to raise rates which would further depress asset prices?
As you can see, Bernanke and the Fed are in a bit of a conundrum with regard to how to manage the economy going forward. In essence, they’re in a “damned if they do, damned if they don’t” scenario. While the steps they took may have staved off the Great Depression 2.0, they really want to be careful that we don’t end up as Japan 2.0.
So while the most recent economic figures may be encouraging, I’m not ready to call us “out of the woods” yet. A lot of these figures can be directly attributed to the stimulus packages, and once that stimulus runs out, will the economy be back on track? If they pull the trigger too early, we could fall back into recession and possibly depression. If they leave it in place too long, we could see a much greater erosion of the US dollar, an even more unfathomable US deficit, and a further crisis of confidence here and abroad.
All we can hope at this point is that Bernanke can walk the walk and not just talk the talk.
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