Earlier this week, the federal government officially declared the country to be “in a recession”, a fact many of us have known for a long time. This news is not all bad. Of course, none of us are happy about an economic downturn, yet, I do believe that it is only when we recognize the issue, can we start our economic recovery. This is why I think the announcement of a recession is “good news”.
For one thing, we’ve been in a recession before (as many as five in the past 35 years) and know what programs have and have not worked in the past. Granted this downturn period is quite dramatic, deeper than most, and may require grander programs to lead us back. It is through our understanding of history that we will find the programs to get the economy back on track.
On average, the time spent “in a recession” is less than a year. Typically, an economic slow down occurs about 9 – 12 months prior to the official declaration of a recession. As well, it takes 9 -12 months to really feel a recovery after the official end of a recession. In all, the time where the effects of a recession are felt is about 3 years. Recessions do not start nor end immediately.
Officially, we have been “in recession” for about 13 months. If this downturn follows an average recessionary cycle, the end (not “THE END”) but the easing of recessionary pressure should be near. Although the most recent downturn is longer in duration, it has followed a similar path to other recessions. This economic slow down started with the softening of housing prices in early 2006. By mid 2007, banks had over tightened credit causing a further drop in real estate prices and lessening demand. The loss of home equity and credit caused a dramatic slowing of construction and durable goods orders.
With stagnating home appreciation people moved to alternative investments to bolster returns and rushed to buy commodities and foreign markets leading to a speculative bubble in early 2008. This speculative bubble caused a spike in gas and oil prices further restricting the consumer’s ability to spend. By mid 2008, the bottom had dropped out of the market, banks had all but shut off credit and we had an administration (White House, Treasury and Federal Reserve) that lacked any signs of competence or leadership. Mix these all together and voila: a recession with bankruptcies, foreclosures and bank failures. With it came panic, causing the manic/depressive equities and commodities markets to flail around without signs of discipline, logic or leadership.
Consumer confidence has fallen off a cliff. Without consumer confidence there can be no economic recovery. Confidence comes from clarity, without a definitive declaration of the “recession” there could be no clarity. In general, people grasp the idea of a recession and understand they have lived through a recession before. People cannot find any hope or optimism in the idea that there is an implosion of the entire economic system. With the identification of the crisis, we can start to find solutions to resolve the crisis and bring back confidence. When confidence returns the economy will recover.
OK, so where is the “good” news in all this. Here are some reasons why I think we are getting ready to emerge from the darkness of the most recent downturn.
– The uncertainty of not knowing if we are or not in a recession has been removed. Uncertainty and fear cause markets to act irrationally. In times of economic uncertainty, investment of any type will practically come to a halt. I believe there is a certain amount of relief having the “recession” officially identified.
– A new administration brings hope. A new team comprised of capable people will do what is necessary to bring the economy back. President-elect Obama has formed a team of very talented, smart and capable people. This new team will bring some stability and leadership to bear to resolve the economic crisis.
– There are many programs being offered to jump start the economy. There are programs to: lower interest rates, inject capital into the market, encourage capital spending, provide tax incentives for house purchases and improvements, give incentives to purchase autos and direct to consumer stimulus packages. All are designed to get the economy moving again.
– Lower housing prices have brought in more buyers. Lower housing prices and interest rates have increased the number of buyers, reduced the number of available homes on the market and helped stabilize housing prices.
– Mortgage interest rates are at historic lows. 30 year fixed rate conforming mortgages are being offered with interest rates in the low 5% range. Lower mortgage interest will lower monthly carry costs and foster home buying. There are discussions to have the government lower rates to 4?% for home purchasers.
– Local banks have the money and want to lend and invest in their communities. Most local banks did not get involved in the speculative mortgage securities and subprime loans created on Wall Street, as a result have few foreclosures and “bad loans” to deal with. Often, local banks fund mortgage loans through their cash on hand and service the mortgages locally. A nice thing about working with local banks (and there are many) is the local banking representatives are our neighbors and understand the local market. Local loan officers consider the person, not just a credit score, as well as the market they service to make a fair assessment of the borrower’s qualifications.
– There are proposals to give tax breaks for home purchases. I’ve heard proposals that offer amounts up to $20,000 in tax deductions to encourage home purchases. As well, there are tax incentives to improve your home with energy efficient products and green technologies (solar, etc.).
– New home building has practically come to a stop as builders work through their inventory. A recent report showed housing starts are at their lowest levels since 1982. With an up surge in buying and few new housing starts, new home inventories could be reduced to very low levels in a very short period of time.
– There are government and private programs to slow or prevent home foreclosures. These programs are designed to help people stay in their homes. Lessening the number of foreclosures will lower the number of distressed homes on the market and will help stabilize housing prices.
– Commodity prices have fallen dramatically. Prices for oil, gas, copper, etc. have fallen, in some cases over 50%, lowering costs for consumers. These price drops came from demand destruction (the lack of demand for a product) and if we continue to lower our consumption of gas and oil by employing green technologies, we will continue to enjoy the lower costs and further our prosperity.
– Consumers are becoming more frugal while increasing savings. As consumers, we must be disciplined in our use of credit, employ our capital wisely and increase our savings.
Needless to say, there are still some dark clouds on the horizon and it will take some time to weather this storm. Rising unemployment will continue to cause fear and uncertainty in the market place. Unemployment figures are lagging indicators and will not show improvement early on. As the economy settles down, credit eases and cash starts flowing again, employment numbers will improve and consumer confidence will return.
A slow, steady move toward economic improvement will lead to improved consumer confidence and stabile markets. As the economic programs start to have a positive effect on the economy, a feeling that our personal situation is improving will allow us to take advantage of the opportunities that a “recession” brings us.