By Steve Levy
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.