In the 1950s, teachers told students to “duck and cover” in the event of a nuclear attack. We know now (and should have known then) that cowering under a desk would not provide much protection against radiation poisoning. But it may be a reasonable strategy for dealing with the continuing onslaught of dismal economic news. You certainly don’t want to spend a lot of time staring at the daily stock market reports or (even worse) reviewing the statements for your retirement account.
Critics have pointed to the stock market’s continuing downward trek (hovering around 6,500 at mid-day on Friday) as evidence that investors have little confidence in the Obama Administration’s plans for revitalizing the economy and salvaging the banking industry. But President Obama has insisted that the stock market’s performance is not the appropriate measure of government efforts. “What I’m looking at is not the day-to-day gyrations of the stock market, but the long-term ability of the United States and the entire world economy to repair [itself],” the president said during a meeting with British Prime Minister Gordon Brown. The stock market, he added, is “sort of like a tracking poll in politics….It bobs up and down day-to-day. And if you spend your time worrying about that, then you’re probably going to get the long-term strategy wrong.”
The results of the Administration’s long-term strategies remain to be seen, but the near-term economic reports remain unrelentingly dismal. Last week’s unemployment numbers were even worse than the severely negative predictions. The national unemployment rate hit 8.1 percent in February as employers shed another 655,000 jobs for the month. The Labor Department reports that 6.5 million unemployed workers are currently receiving benefits and 2.6 million of them have been out of work for more than six months.
A Dim Light
The economy shrank at a 6.2 percent annual rate in the fourth quarter, turning in its worst performance in 25 years and producing what Federal Reserve Chairman Ben Bernanke termed “a severe contraction.” The Fed claims to see a light at the end of the recession tunnel around the end of this year, but that light is dim and uncertain at best, depending, Bernanke said, on the success of government efforts to stimulate the economy, prop up the still teetering banking system, and bolster investor and consumer confidence. “Only if that is the case,” he told the Senate Banking Committee, “is there a reasonable prospect that this current recession will end in 2009 and that 2010 will be a year of recovery.”
Signs of improvement are hard to find in a sea of negative numbers, and the few positive indicators that surface are usually accompanied by “don’t get too excited” statements from economists, explaining why any upward movement is unlikely to be sustained. For example, the Institute of Supply Management’s Manufacturing index increased to 35.8 in February from 35.6 – better than the 33.8 reading analysts had predicted, but (as several analysts quickly noted, lest anyone feel inclined to break open the champagne), still well below the 50 reading that indicates a shrinking economy, and below the 41 level indicating a broad recession.
A modest – and we do mean modest – improvement in consumer spending (up 0.6 percent in January) brought similar cautions from analysts. Rising unemployment rates, they pointed out, will almost certainly keep spending levels down and savings levels up.
Underscoring that point, the consumer savings rate reached 5 percent of disposable income in January, its highest level in the past 14 years, while consumer confidence, as measured by the Conference Board Index, reached a new low, plummeting from 37.4 in January to 25 in February.
“Just when you think confidence can’t go any lower, the bottom falls out of it and you can be sure the rest of the economy isn’t far behind,” Chris Rupkey, chief financial economist of the bank of Tokyo, told Bloomberg News. “If consumer spending matches their flagging spirits,” he predicts, “this recession is going longer and deeper.”
Consumers have good reason to be down in the dumps. The Federal Reserve calculates that the average net worth of U.S. households declined by 22.7 percent between December of 2007 and October of 2008, as falling home values and shrinking stock portfolios erased the 17.7 percent gain in net worth recorded between 2004 and 2007.
House of Horrors
And we haven’t even gotten to the most recent housing numbers. In a now sickeningly familiar refrain, sales of existing and new homes, home prices, and housing starts continue to fall, while foreclosures (topping 250,000 in January for the tenth consecutive month) continue to rise, leaving 14 million homes – one out of nine properties – now vacant .
Mortgage delinquencies jumped by more than 50 percent in the fourth quarter, according to the Mortgage Bankers Association – not unexpected, Keith Carson, a senior consultant for the trade group said, but “still alarming.”
Some analysts are predicting that foreclosures could top the 3 million mark this year, beating last year’s record of 2.7 million, and putting further downward pressure on home prices, already down more than 20 percent over the past year. More than 8.3 million homeowners are currently under water, with mortgages exceeding the current value of their homes, and another 2.2 million will join them if prices fall by another 5 percent, according to an analysis by First American CoreLogic.
Housing industry analysts cited the unexpected increase in existing home sales in January as a sign that the housing market was turning around – until sales turned down again in February. But Lawrence Yun, chief economist for the National Association of Realtors, views recent small but consecutive declines in inventory levels (for existing homes) as “an encouraging sign” and reason to anticipate that the NAR’s affordability index, now at its highest level in more than a decade, should start pulling buyers back into the market.
Too Many Headwinds
Other analysts think that’s wishful thinking. With the economy still contracting, unemployment rates rising and credit policies still restrictive, “there are just too many headwinds for homebuyers,” Sal Guatieri, senior economist at BMO Capital Markets in Toronto, told Bloomberg News. “The housing market is showing no sign of a bottom,” which, Guatieri suggested, “could be the story for the first half of this year.”
Warren Buffett, chairman of Berkshire Hathaway, agrees, predicting in his company’s annual report, “The economy will be in shambles throughout 2009, and for that matter, probably well beyond.”
The $75 billion loan modification program the Obama Administration has rolled out may put a floor under foreclosures, and the massive government stimulus bill approved recently by Congress may pump much needed financial life into the economy. But even the strongest supporters of those programs don’t expect the results to be immediate.
“No one program is going to solve all the problems at one time,” according to Adam York, an economist with Wachovia Corporation. York’s prediction: “We are going to have a long, agonizing road to recovery.”