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By Steve Levy

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About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved ...  (More)

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When will the recession end?

Uploaded: Apr 15, 2009
The three questions I get asked most these days are (1) "When will the recession end?" (2) "Are we in for another Great Depression?" and (3) "When will the economy get back to normal?"

A wide range of economists who study the short-term outlook have the recession ending in between eight and 14 months. By ending, they mean that job levels and home prices will have stopped declining and total spending in the economy will be increasing again. Unemployment rates will go up for a few more months as job growth is not large enough to provide jobs for everyone entering the workforce. Last week's Wall Street Journal poll of economists had GDP (gross domestic product) bottoming in September with job growth starting some time after that and unemployment rates rising until mid-2010.

If this is too wishy-washy for you, I refer readers to the recent interview on CNBBC with Fred Guess, chief economist for Economics and Astrology International. Guess told CNBBC reporters that the recession would end on November 19th, 2009 in time to bring cheer for Thanksgiving.

"You can count on this," Guess said. "I have taken out a second mortgage on my house, sold everything in my 401(k) and asked my children to drop out of Stanford for a semester so I could amass a sum to wager in Las Vegas." He is reported to have said that he has complete confidence in his forecast.

"What else would you expect from someone named Guess?" he asked.

And now back to the real world, which unfortunately does not lend to much certainty at this point.

Why the recession is likely to end by the middle of 2010

My previous blog on the causes and cures of recessions explained the three bottom-line points for following this recession: (1) recessions are caused by a drop in spending; (2) the federal government has the responsibility and tools for fighting recessions by initiatives to increase spending; and (3) the current recession is complicated by the addition of severe stresses in the nation's housing and financial markets.

Most people I deal with don't ask me whether I think the anti-recession efforts of the administration are good ideas or what the administration could or should have done differently. They ask me what I think will happen.

I think (and so do most national forecasters) that the policies put in place recently -- the $787 billion stimulus package, the initiatives to reduce foreclosures through refinancing and loan modification and the initiatives to stabilize the financial system -- will eventually turn what President Obama calls "this big ocean liner of our economy" from recession to recovery. In addition there is a clear message from the president, the treasury secretary and the Federal Reserve Bank chairman that they are committed to do what is needed.

These initiatives represent a considerable amount of heavy weapons aimed at the recession. I would have structured the stimulus package somewhat differently if I had been elected and had control of Congress (and pigs could fly) and that seems true for many posters on Town Square. But if you are not into the back-and-forth of political debate and are just trying to puzzle out your family's course, I think the important point is that there is a lot of stimulus about to hit the economy and more coming as needed.

The anti-recession initiatives are just starting to be implemented. For the next few months we will see a mixture of good economic news and continuing declines in production and job levels. People who feel the initiatives will eventually work don't know that for sure because they are just starting and people who think the initiatives will lead the nation to ruin also don't know whether they will work or not. The reason that economic forecasters say the recovery will start as soon as eight months or as long as 14 months is that they don't know how soon the anti-recession efforts will kick in or whether Stimulus 2 and 3 will be needed and approved by Congress.

My sense is that readers should expect Stimulus 2 and probably Stimulus 3 as the current initiatives are only a first step in turning around the downturn in spending and lending.

What should readers look for to know how we are doing?

The unemployment benefit increases and tax cuts have started. Some money is flowing to states for schools and medical care. A few infrastructure projects have started. Applications for the next round of infrastructure spending and stimulus money for state and local governments are being submitted and reviewed. The initiatives for refinancing and home-loan modification have launched and homeowners have started to submit applications for assistance. The initiatives to support the financial sector through capital infusion, loan guarantees and the purchase of toxic assets are underway.

The most important sign that the economy is turning around will be a reduction in the number of monthly job losses from the current pace of more than 600,000 per month. As the stimulus money enters the economy, there should also be signs that consumer spending is stabilizing and beginning to turn up. Readers should look for announcements about the number of home loans that are refinanced or modified and also look for increasing sales volume in the housing market and some signs that prices have leveled off.

In the financial sector we will look to see if private investors begin to buy and banks begin to sell some of the "toxic assets" that banks are holding. We can look for an increase in lending although that is a two-way challenge: (1) to get banks to lend and (2) to get families and businesses to be confident enough to borrow -- but wise enough to borrow responsibly.

It is reasonable to expect job losses to slow and some progress to be made in housing-market stability and financial-sector stability by July. If job losses continue at current levels into the summer we will need to go to Plan B, whatever that might be.

You may not like the administration's choices. I don't like all of them myself and I worry about our readiness to bring the budget into balance when the recession ends. But I agree with the general direction of these policies and have confidence that if they don't work quickly that the administration is sincere in indicating flexibility and a willingness to do more if necessary.

Equally important, I think this economic downturn is a serious matter. I understand the need to help people and institutions who might command our disapproval for being really unworthy. We are all in this together and our fates are connected. The line about helping Wall Street to help Main Street is, for better or worse, an accurate assessment of where the economy is today. And it is why I will not harp on the 20 percent of the plan that I would have liked to be different and leave the assessment of blame for another day.

Are we in for another Great Depression?

I think a Great Depression is a really remote possibility. The federal government has enough weapons to use to turn the economy around and has the will to use all the necessary tools. The nation did overspend and over-borrow. For several years we spent $1.05 for every dollar we earned as a nation. A correction is needed and underway. It is painful but getting back to spending a dollar for every dollar we earn is well within our ability. The economy still possesses considerable strengths in business leadership and innovation and in the motivation of families to work through our difficulties and create a new and more stable prosperity.

When will the economy return to "normal"

If by "normal" you mean the home prices, debt levels and stock prices at the recent peak, we probably will not return to normal anytime soon. In Silicon Valley venture-capital funding reached $40 billion in 2000. From there it fell to $8 billion and has slowly grown to $13 billion. If "normal" is $40 billion, we won't see that level in any near future. If normal is a steadily rising level of funding, we can expect this outcome and can do fine as a regional economy.

If normal is median housing prices of $750,000 in Morgan Hill (the median in February 2008), then normal isn't coming back for a long time. If normal means housing prices that grow in line with income growth, this scenario is attainable and will provide a more solid foundation for long-term economic growth than the recent housing-price bubble.

If normal is spending (and borrowing to spend) $1.05 for every dollar we earn, that normal is gone for a long time. If normal is spending what we earn, then we can get back to normal fairly soon.

Many families will be poorer for a while as their home values and retirement portfolios are down from the peak levels of 2007. This adjustment is painful for many but we have all been through economic cycles before and survived mistakes in business and government management.

This is a really bad recession, not less, but most likely not more.

Comments

 +  Like this comment
Posted by stephen levy, a resident of ,
on Apr 18, 2009 at 9:49 am

stephen levy is a registered user.

Yesterday's jobs report added new evidence that Silicon Valley has joined the state and nation in the eye of the recession.

However, the news was not unexpected given the bad national jobs report of two weeks ago and the continuing declines in consumer and business spending both here and with our major export customers.

The stimulus efforts started in late March after the March jobs data were collected and even with the best of fortune, job cuts are expected to continue through the summer. So we don't know much more today about the pace of recovery than we did before yestrerday's disappointing news.

We are all connected in the sense that strong economic recovery depends on the success of the "three-legged stool" of stimulus spending, housing initiatives and initiatives to improve the ability and incentives for financial institutions to provide credit prudently.


We are close to being able to confirm one piece of good news--that we are at a bottom in terms of the lower-priced home market here and around the state. There have been three months now of strong sales of homes that are selling for half or less of what they were valued at two years ago.

This is good news on three fronts. One, it says that there is active interest backed by cash to buy homes in the Bay Area. Two, there is a siler lining out of other people's pain in that families previously priced out of Bay Area markets can now afford a home. Three, and this is important for the long-term prosperity, comapnies can look at Silicon Valley and know that many more workers can afford to live here than was true just two years ago.

The housing market correction has not yet reached Palo Altoor other high end markets. Sale prices offered by owners are still too high to create any significant level of sales as readers can see by looing at the very low transaction levels shown each Friday in the Weekly. I don't see how Palo Alto will be able to avoid a substantial correction in home prices over the next 12 months for people who have to or want to sell their homes.


 +  Like this comment
Posted by stephen levy, a resident of ,
on Apr 29, 2009 at 5:05 pm

stephen levy is a registered user.

The economy remains in a period where good news alternates with disappointing news. We are no closer to knowing when the economy will turn around and how rapidly the economy can recover.

There are more "glimmers of hope" as President Obama calls the bits of good news.

Today's report of a sharp decline in GDP in the first quarter of 2009 contains more good news than bad for the prospects of recovery. Since the recession is manifested by a sharp drop in spending, the response of businesses has been to cut production and job levels.

Nearly 50% of the decline in GDP last quarter was caused by a decline in inventory levels as businesses cut production to match falling sales levels. There is some hope in the first quarter results that consumer spending has bottomed out. As a result the decline in production and inventory will set the stage for an increase in production when spending begins to pick up spurred by the anti-recession policies in place.

There is also hope that the recent job losses have moved businesses back into balance between sales amd production.

As yet the employment data remain discouraging with no sign yet that job losses are lessening. So expect a few more months of job losses and rising unemployment.

There are more glimmers of hope in the housing market as prices have stabilized in the low price part of the market and sales levels are high as buyers are attracted by low prices. We have no evidence yet that the high end of the market is near stability as sales levels remain very low.

Recent announcements by the administration about housing loan modification policies and by the Federal Reserve Bank about making money available for lending confirm that the administration will add stimulus initiaitives over time to what is already in place.

I think July is the period when we should get a first take on whether the existing programs have started to bring job losses down and signal a turnaround by the end of the year.

The prognosis in 2009 and 2010 for state and local government budgets is awful no matter how qucikly the recovery proceeds.


 +  Like this comment
Posted by stephen levy, a resident of ,
on May 9, 2009 at 1:26 pm

stephen levy is a registered user.

This is my tbird update on the question of when the recession will end. I will continue to update every week or two as more news emerges.

We continue in the period I expected of alternating good news (glimmers of hope) and bad news (reminders that the economy is still heading downward).

Job losses and new unemployment clains continued at high levels in recent data but both series showed less "bad news" than in the previous month. Still more than 500,000 job losses in April is way too much to consider that the recession is near the end. Job losses will need to be down in May, June and July and be less than 300,000 before we know that the recession will end soon.

And the pace of recovery is very uncertain.

One piece of unambiguous good news is that China's stimulus efforts appear to be working. A growing Chinese economy will help all countries in their own recovery efforts as China purchases goods and services from many other countries. It is another indication that we are connected as a world economy.

Most major questions remain unanswered. There are no indications yet of hwo successful the efforts to modify home loans and reduce the risk of foreclosures will be. We have had several months now of seeing active buyer interest at low foreclosure prices but success in seeing an upturn in the housing market will require success in modifying millions of existing home loans.

The stimulus money is starting slowly to enter the economy and the pace will pick up. In addition the administration adds a new program nearly every week to put money into the economy.

The administration is pursuing an "all in" agenda and will add whatever they think is necessary and find ways to add stimulus without needing congressional approval if need be.

They are trying to dance through the raindrops with banks in the sense that the administration is hoping that small additions of capital announced this week in the stress test results plus strong bank earnings plus success in stabilizing the housing market will make more drastic efforts related to banks unnecessary.

I still think July is when we will know whether the economy is really on pace to turn upward by year end. Even then unemployment will rise for a few more months and the pace of job growth is uncertain.


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Posted by stephen levy, a resident of ,
on Jun 13, 2009 at 5:46 pm

stephen levy is a registered user.

In mid June we remain in a period of alternating hopeful and less hopeful economic news.

For now we have some stability in the banking sector and some TARP money is being repaid long before anyone expected.

On the other hand the loan modification programs have little participation so far and it is hard for me to see how the housing market recovers without removing some of these potential foreclosures.

I have faith that the stimulus will work somewhat and the money is only starting to be spent. But job losses are still high, though slowing and the economy is still headed down.

It certainly looks like the talk of another Great Depression was premature and we are stuck in a vicious recession but no more.

My own sense is that another round of stimulus funding for state and local governments is a good idea for the economy and for maintaining public services. If continuity in the banking sector and for AIG and GM is in the public interest, then continuity as much as possible for public services should merit the President's support.

So it is still July when I think we will know whether the recession is really about to end.

There will be a jobs report on July 3 and again in early August and that should tell whether job losses are nearly over. And there will be a first GDP report in late July, where experts are expecting a much lower second quarter loss than in Q1.


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Posted by stephen levy, a resident of ,
on Jul 11, 2009 at 10:53 am

stephen levy is a registered user.

I said we would begin to know how the stimulus and other programs were working in July.

To my mind we are moving toward the end of the recession but more slowly than expected and too slowly for me.

Job losses and new unemployment claims are too high to feel good about the timing or strength of any recovery.

The banking policies are looking like they are working so far, which is one good sign.

But the laon modification programs are lagging badly. I support efforts by Obama to push lenders harder as he may do shortly. We are a long way from erasing the overhang in potential foreclosures.

I have written widely in favor of a second round of stimulus directed at state and lcoal governmetns across the country. CA does not derseve special consideration but the 50 states are facing $230 billion in shortfalls over the next year or two.

Paul Krugman states the situation and dilemma more eloquently than my words can do. Here is his recent op-ed.

Web Link

We could use the TARP repayments or accelerate existing stimulus money but I also favor additional aid to state and local governments.


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