Published: July 27, 2009 09:11 am      

There are signs economy is starting to recover

First the bad news. In several weeks, the lazy, carefree days of summer will end and educators and students will return to school.

I suspect few students are reading this, so we will keep this a secret for the time. In a month, structured learning will begin again and the measurement of the student’s effort will need to be made through report cards.

We are six months into the Obama presidency and approaching a year since the meltdown on Wall Street. Maybe it is time to report on where we are in this economic cycle. We are currently in the longest post-war recession at 19 months and counting, being dubbed the “Great Recession.”

The previous record was 16 months, twice from November 1973 to March 1975 and July 1981 to November 1982. It may be that the trough of this recession was reached last quarter, but these are determined in retrospect. The last two quarters of gross domestic product ranked fourth and fifth worst of all time. The fourth quarter of 2008 was -6.3 percent and first quarter 2009 was revised to -5.5 percent.

The official unemployment rate is 9.6 percent and appears to be heading over 10 percent. The previous high was 10.8 percent reached in December 1982, a month after the end of that recession. This pattern may be repeating itself with unemployment continuing to climb, even after the recession is declared over. With rising unemployment, consumers are reluctant to spend, if they are able, crimping other sectors. Consumer spending accounts for 2/3 of GDP, so a consumer slowdown has a profound impact on the domestic economy.

Adding to consumer woes are the rising delinquency and foreclosure rates on real estate. Across the country, on average, home prices are off 32 percent from their peak in June of last year. June data indicates that housing starts and building permits have increased, but with excess housing inventory on the market, an increase in home supply is likely to prolong the decline in housing prices. The pace of existing home sales has started to trend up and current home inventory stands at over a nine-month supply on the market, at existing sales rates. The National Association of Realtors stated that when inventory shrinks to a seven-month supply, prices will stabilize, possibly next year.

Two keys to stabilizing the economy are jobs and housing. Unemployment numbers are lagging indicators and housing needs to work off some supply, but current numbers would indicate neither will be a quick fix. In recent Congressional testimony, Federal Reserve Chairman Bernanke indicated that current conditions would likely warrant maintaining the federal funds rate at exceptionally low levels for an extended period of time. This will likely extend the period that consumers and businesses can deleverage their balance sheets and permit home borrowers to re-finance. This may help stabilize the housing market by reducing the supply of homes placed on the market due to foreclosures and strengthen business balance sheets, permitting inventory replacement or capital investment, creating demand for employees.

There are tentative signs of the worst being behind us. The index of leading economic indicators has posted three consecutive months of positive indicators. This is usually an early sign of the beginnings of recovery. The S&P 500 rose sharply from its March 2009 lows, up over 38 percent in early June, correcting by 7 percent to early July, and then advancing approximately 9 percent to mid-July. Investors may be anticipating recovery and second quarter earnings reports show some promise, although much of the increase in earnings per share came from cost cutting efforts rather than revenue increases. U.S. exports have also increased, much of this increase fueled by a nearly 30 percent increase in Asian industrial production. Domestic consumer woes have reduced demand for imports but a corresponding increase in export demand has reduced the U.S. current account deficit, taking pressure off the dollar in currency markets and possible increases in interest rates.

As report cards go, the economy is showing some improvement but is likely going to need to spend more time on its homework. There is a possibility of some back sliding if default rates of commercial real estate and consumer finance securities (credit cards and auto loans) increase. The student may need to spend some late afternoons getting some extra help and attention, reducing his free time, but with some additional application and hard work, he should see advancement into the next grade, come next summer.



David Helscher is a senior vice president and trust officer with Clinton National Bank.