Posts filed under 'recession'
October 3rd, 2009
And I thought I was a pessimist.
According to a study released last week by a pair of economists at Rutgers University, the economic slowdown will persist long after even I had predicted.
Think 2017. That’s how long the authors expect it will take to get back to pre-2007 levels — and that doesn’t factor in job growth.
It is, to say the least, a sobering report, calling the first 10 years of the century the Lost Employment Decade. In fact, it marks the first time since the Great Depression that we’ll record a loss of jobs over the course of a decade.
To put this new experience into perspective, during the final two decades of the 20th century, the nation gained 34.4 million private-sector jobs. Today, it appears that we are “destined to lose more than 1.7 million private-sector jobs” in this decade, according to the study.
But then there’s the growth of the labor force. The Bureau of Labor Statistics expects the work force to grow by 1.3 million people through 2016. So just to stay even, we’d have to find an additional 1.3 million new jobs as well as the 7.6 million lost through September.
One of the more ominous developments found by the authors, James Hughes and Joseph Seneca, was the decline of the service sector. In previous recessions, it represented a small part of the job losses, with most of the drops coming from manufacturing and construction.
In the 1981 recession, for example, job losses in the service sectors — which covers a broad swath of industries, from financial consultants to attorneys to hotel employees — registered about 2 percent of overall job losses.
Lately, however, the number has skyrocketed, accounting for more than 50 percent of job losses, according to the study.
Hughes and Seneca cite a few things that have hampered job growth throughout the decade, including the cost of health care benefits. Indeed, why create more jobs when the cost of the additional workers’ health care benefits could bankrupt you?
On the other hand, some companies may have registered productivity gains, enabling their output to grow without adding to their employment rolls. This could indicate a more efficient economy at work.
Still, the bleak reality has some far-reaching implications, including a significant rise in the competition among states for industries that will bring jobs.
This, of course, means there are opportunities out there for communities like ours. And while cities and counties have limited control over their overall economic environment — state policies tend to be larger drivers, not to mention that Midwestern communities lack Arizona’s climate and California’s coastline — taking advantage of any growth means we will succeed only if we step up our game.
As always, companies looking to relocate have a number of priorities: ready availability of educated or trained workers, access to the company’s markets, a public infrastructure that provides a high quality of life to its workers and high-performing schools.
Looks like Rockford has its work cut out for it.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
September 5th, 2009
We’ve been hearing a lot about the New Economy lately, the new “normal.”
We are saving, not spending. We are clipping coupons, wearing our frugality proudly. We are organizing neighborhood swap meets.
So goes the prevailing wisdom, at any rate. It’s no longer the economy we knew, national experts intone solemnly, even as an encouraging number of reports suggest that the Great Recession, if not actually dead, is at least having trouble breathing.
Still, they say, Americans have rethought their fiscally imprudent lifestyles and have embraced living without.
Nonsense. What they don’t say, and what I’m wondering, is how long it takes before “new” gets old.
For the American consumer, it doesn’t tend to be too long. After all, we can get just so excited about reusing tin foil before the urge to buy something new becomes overpowering.
Certainly, rising unemployment is enough to put a damper on anyone with a hankering for a new electronic gadget. And as I wrote last week, the economy isn’t actually going anywhere unless consumers get back into the spending business.
But they will. If the baby-boomer generation has taught all other generations anything, it’s our right to spend money.
And after a full decade of unbridled spending, there’s a lot of pent-up demand out there.
We may have been forced to recover some semblance of sanity — to start cleaning up our debt, to live within our means — but it never lasts.
And that’s OK — just like we needed a housing bubble to pull ourselves out of the crisis after the 9/11 terrorist attacks, we need consumer activity to jump-start this one.
But there’s an interesting dynamic that will kick in at some point, one that promises to keep our standard of living below the heady years of recent memory.
Those same baby boomers, the ones who taught the world how to spend, are moving away from their spending years.
They’re moving into retirement, or savings, mode.
And the rest of the population doesn’t have that kind of spending power at their disposal.
I think we’ll see a mini-bubble, when the boomers pocket that pent-up demand and head out to spur the economy. But inevitably, it will slow, with more of it making its way to the health-care system and the rest safely in retirement and savings accounts. For the rest of us, that’s the new “normal.” And it hasn’t been established yet.
Even when it does, we’ll find a new reason to find ourselves atop an unsustainable mountain of debt — it happens every decade or so, after all — as individuals and corporations develop “recession amnesia,” as Rockford Area Economic Development Council chief Janyce Fadden calls it. And then we’ll find another new normal.
It’s the thing to remember about the economy, new or not: We don’t like change, and we tend to return to our most comfortable behaviors. Even if those behaviors can be a little self-destructive.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
August 15th, 2009
The central bank of the U.S. is walking a real tightrope these days. And some folks already are betting against it.
The specter of inflation, or worse, hovers ominously on the horizon, and if the Federal Reserve can’t rein it in judiciously, it stands to significantly impede any progress we make toward an economic recovery.
Since global finance fell apart last September, the Fed has pumped literally billions of crisp new dollar bills into circulation. Sort of.
They’ve printed these new bills, certainly. But many of them aren’t technically “in circulation” at the moment because the financial institutions to which they were given aren’t spending them.
Then there are the billions more paying for the Obama administration’s stimulus projects, all of it designed to force the economy to right itself. And when it does, those dollars will start trickling into general circulation.
Therein lies the tightrope on which the Fed must delicately balance: When do they start decreasing the money supply, which is much, much greater than market demand?
Used correctly, inflation and increased government spending are useful tools in a recession. Increase the money supply and lower interest rates and, bingo, lending goes up and the economy gets a jolt. Use the government’s money to put people to work and, bingo, spending goes up, the economy gets a jolt.
The downside, of course, is the resultant decline in the value of a dollar.
And the amount of money available is enough to trigger hyperinflation, which, as you can probably guess, is just like inflation except worse.
As I said, a few have established hedge funds betting on hyperinflation, which seems a little too pessimistic, even for me. Still, the Fed didn’t have much of a choice. The alternative, to let the markets figure it out themselves, would have almost certainly led to a depression to rival the first. In fact, the lack of government intervention is one of the primary reasons the Great Depression came about in the first place.
Fed chief Ben Bernanke, a student of the Great Depression, knew that if the government didn’t start a massive infusion of cash into the marketplace, the entire system would fall apart.
But now comes the tricky part: pulling that cash back into Fed coffers before it gets loose and sends the system careening out of control again, this time in the other direction.
But history — in fact, pre-Depression history — has left Bernanke another road map to follow, even if it’s a good example of what not to do.
After World War I, when Germany was saddled with debt it couldn’t pay, its central bank started printing money.
Within a matter of months, goods shot to stratospheric levels. In the time it took to enjoy a cup of coffee, the price of the cup doubled. Restaurant waiters had to reset prices on menus several times a day. Workers were given a half-hour after they were paid — in thousands upon thousands in currency notes, which they carted around in wheelbarrows — so they could spend the money before it became worthless.
As Liaquat Ahamed wrote in his excellent book “Lords of Finance,” it was “the single greatest destruction of monetary value in human history.”
Bernanke believes he can wind up that money before it does too much damage. And for the time being, I’m keeping my money on him.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
August 1st, 2009
Glimmers of economic hope have been dawning on the horizon, and they’ve prompted a flurry of news reports containing such words as “recovery,” “bottom,” “rebound” and “optimistic.”
Unquestionably, they’re a relief after nearly two years of unrelenting reports containing “plunged,” “plummeted,” “sales” and “stock market,” or “skyrocket,” “soar,” “unemployment” and “oil prices.”
Still, there are two important things to keep in mind when reading these reports:
1. Watch the clock.
2. They really don’t matter.
At least, as far as you and I are concerned.
If all politics is local, then the economy is more so. And such an elusive concept as economic recovery will only be recognized when we can actually see it — when the rising number of unemployed people in Winnebago and Boone counties head back to work, when the restaurants and retailers on East State Street or Illinois 251 are bustling again, when neighbors move in next door.
The word that must be included in those stories, of course, is “sustained.” And lately, it isn’t.
That’s why I remain bearish, despite the reports that retailers had stronger-than-expected sales gains in the late spring and early summer or that home sales saw a good month or two around the same time. Certainly it’s cheering news. But it’s also why watching the clock is important, for any number of reasons.
The time of year is a big factor, of course, because home and retail sales, even unemployment, tend to record improvements when the weather gets warmer: Consumers get out more, and companies take on seasonal workers.
Even more important, however, is that a month or two of increases does not signal any sort of recovery after such a prolonged contraction. It doesn’t even mean that the market has hit “a bottom.” It just means long-suffering retailers and Realtors may have seen a little — in some cases very little — relief.
Consider: Homebuilders in Belvidere and unincorporated Boone County saw the number of residential building permits grow 100 percent — 100 percent! — in June over the previous five months.
The number of building permits filed from January through May? Zero. The number in June? One.
Then again, it also was the first month that the number of building permits filed in Winnebago and Boone counties didn’t drop year over year.
Any signs of growth are hopeful. Just don’t fall into the trap of listening to economists who already insist that the economy is recovering.
In other words, we’ll know when the recession has ended. And it has nothing to do with the official “end” — remember, it was about this time last year that we learned we were actually in a recession, although most of us knew it well before any announcement was made.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
July 4th, 2009
It was starting to look like a glum graduation for students of the country’s business schools.
Millions of people are crowding unemployment offices. Companies across the globe are trying desperately to survive. Wall Street is in a shambles. Besides, what’s the fun of being based at Capitalism Central if Uncle Sam is the one telling you what your take-home pay is going to be?
But take heart, Young Capitalists. I have identified three can’t-miss areas of growth, even in an economy whose glory days are long gone.
First, think bankruptcy. Plenty of companies and individuals have fallen victim to their addiction to debt. But there are plenty more to come. And you can get in on the ground floor of the first boom trend in this New Economy.
That means you should bone up on mergers. M&A activity tends to accelerate the longer recessions linger. And for some experts, the more companies that declare bankruptcy and sell off their parts, or those that want to divest of ancillary divisions to focus on their “core competencies,” spur hopes of imminent recovery — the final shakeout of Darwinian theory.
But the real opportunity is not in the boardrooms of Corporate America. It’s in the shadowy halls of Capitol Hill.
You need to become a lobbyist. Just think of the possibilities.
The Obama administration has been nothing if not busy, dreaming up new regulations to pin on financial institutions of every stripe. And every agency, from the Federal Reserve to the Federal Deposit Insurance Corp., has been piling on as well, not wanting to be left out of the history books.
That means the financial industry is going to need people to get to work immediately to repeal the regulations they don’t like — in other words, all of them.
It means long-term security as well. It took nearly seven decades for Wall Street’s lobby to convince Congress to unwind the Glass-Steagall Act of 1933, which gave the Fed tighter control of banks, prohibited banks from selling securities and created the FDIC, among other things.
It also has enormous potential for growth. It took Wall Street less than one decade to unwind the entire global economy.
Ironic, that.
In 1999, the repeal of Glass-Steagall was hailed as a triumph over a Depression-era relic.
“Today, Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” said then-Treasury Secretary Lawrence Summers, now President Barack Obama’s top economic adviser and the leading candidate for the job of Federal Reserve chairman. “This historic legislation will better enable American companies to compete in the new economy.”
Well, you heard it there first. Welcome to the 21st century.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
June 20th, 2009
I remember when homes weren’t so … well, disposable.
Back when they weren’t comfortably furnished ATMs, that is, with money practically pouring out of the marble fireplace. When they were still valued by the people in them, in other words, and not only as a short-term investment opportunity.
At the height of the housing boom, too many people treated homes like cars — a new one every two years or so.
And that might have been a good plan five years ago, when property values were guaranteed to go up. That’s what Wall Street was determined to believe, anyway.
But somewhere in the boom, another belief began to take root. We cast away the joy of owning a house as it became the latest get-rich-quick scheme for Joe America.
It’s another consequence of the decidedly deflated housing bubble — in addition to several others, like the worst recession since the first time Chrysler asked the government for a bailout — one I fear will have further consequences down the road.
Even today, too many people are “waiting” to sell their homes. Just waiting for a year or two, they say, largely because they don’t seem at all confident that they’ll be able to find buyers. But they’re also waiting until the value of their homes goes back up to 2005 (or 2006) levels.
Such folly. They’ve managed to convince themselves — most likely because they really want to believe it, much like those Wall Street financiers — that their home’s true value is the highest one.
Don’t get me wrong. Their homes will return to those levels. But it will take years to get there, just like it’s supposed to.
A house, like a retirement account, is a long-term investment. Checking every month or so to see how much yours has risen in value makes about as much sense as checking your 401(k) balance every day. It’s really not worth it.
Assuming no catastrophic changes to the neighborhood, such as a hurricane or a hasty gentrification, your home’s value should rise at roughly the same rate as inflation, which averages 2 percent to 3 percent every year.
It’s not a very exciting process to watch.
And it’s one of the reasons more people should have seen this coming — in 2005 and 2006, home values across the country rose by 11 percent and 15 percent, respectively.
In other words, your home was never worth the value it was assigned at the height of the bubble.
It was phantom money. It never really existed. Your house, remember, is only worth what somebody else is willing to pay for it.
But humans are usually driven by hope and fear, and this is where we could get into trouble again — with the resultant consequences.
Too much fear, and the housing market never gains ground, which I believe it must (not everyone does) before the economy can start moving in the right direction.
But too much hope is just as dangerous. We’re too willing to buy into another bubble — even to will one into existence, just so we can get back to buying a house every two years.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
June 6th, 2009
I suspect that we’ll start hearing some good news from banks in the second and third quarters.
After a year of staggering quarterly losses, mostly because of the suddenly ponderous weight of residential and commercial mortgages and mortgage-backed securities, we’ll start seeing gains.
At least I hope we do. If not, we’re in for a really bad year.
But my optimistic projection isn’t because I believe we’ve passed some kind of magic hour in the financial industry, after which earnings and profits mysteriously climb back into the black. Nor is it because banks have suddenly remembered how to, well, run a bank.
Rather, it’s because a change has been made to the rules of accounting, in this case a relatively obscure rule known less-than-affectionately as mark-to-market.
Mark-to-market accounting requires banks to price assets on their balance sheets according to what you can sell them for on the open market.
The banking industry pressured Capitol Hill relentlessly this year because mark-to-market forces it to lower the value of such assets as derivatives, even though many of the loans that back those bonds have yet to default and perhaps never will. But each quarter, those losses amplified the bottom-line losses at a number of the nation’s largest banks, wiping out their capital.
When the bottom fell out of the securities market last fall — and remember, the edges were beginning to fray more than a year before that — a mortgage-backed bond worth $10 million at the height of the bubble became worthless almost overnight, effectively wiping out the bank’s $10 million. The market had literally evaporated.
It required the bank to post the loss and scramble to raise more capital to cover it.
And this was a market worth trillions of dollars, with every bank, investment house and hedge fund in the world participating.
You can see why the banks were so bitterly opposed to the idea — the longer they had to post these assets as losses, the closer to collapse they came.
And you can see the reason for my rosy outlook.
Banks had the option of adjusting their first-quarter results to reflect the change to the mark-to-market rule. And if you’ll recall, the stock market reacted with wild abandon when so many of the nation’s big banks posted better-than-expected results.
But remember, the banks aren’t conducting business differently. They’re just changing the way they crunch their numbers.
So do the first-quarter numbers better reflect the state of the banking industry? Or should we trust the results of the past four or five quarters, before the rule was changed?
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
May 2nd, 2009
Mother Nature, it seems, hates being left out.
Whenever an economic crisis of unparalleled ferocity grips the planet, she seems particularly determined to get a little piece of the action. (For some reason, Major League Baseball likes to be involved, too.)
Ladies and gentleman, may I present swine flu.
As if our latest Great Recession isn’t enough, along comes Mother Nature and one dilly of a flu bug. Like the economic crisis, it is spanning the globe. And it stands to intensify the economic fallout of the financial meltdown — at least, if history is any indication.
In the 1930s, as the Great Depression threatened to strangle the economy, the Great Plains states disintegrated. Almost literally.
The Dust Bowl took root after the severe drought that began in 1931. From Kansas to Texas, one of the world’s largest wheat-producing regions became an arid wasteland in less than two years. The exodus began for farmers and their families. It lasted most of the decade and stymied most early efforts to stabilize the economy.
In 1989, when the federal government finally stepped in to resolve the savings-and-loan crisis that had plunged the economy into a recession, Hurricane Hugo ravaged the Carolinas just before an earthquake roiled the San Francisco Bay area, postponing the start of that year’s World Series for 10 days.
Clearly, Mother Nature is trying to make some kind of point.
I could argue, of course, that it’s less the meddling of Mother Nature than the complete inability of the public to remember the recession, thus almost ensuring a next one. Besides, Mother Nature never takes a break — the SARS outbreak in Asia was in 2004; the tsunami that ravaged Indonesia was in 2005. And those were terrific years, economically speaking.
Still, it all seems a little too coincidental to me, especially considering her role as the culprit behind the Dutch tulip bulb bubble of the 1630s.
Her timing is a little off sometimes. One of the most significant earthquakes of all time, according to the U.S. Geological Survey, rocked San Francisco in 1906. It wasn’t until the next year, which found the country mired in a deep recession, that John Pierpont Morgan rallied his rival bankers to pony up their own money to stave off the Panic of 1907.
And lest you forget, the Cubs won the World Series that year.
Even Mother Nature can have an off year now and again, but nothing like the Cubs.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
