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Dismal Economy
By: Dr. Charles Lieberman
Date: 1/12/2009
The economic news is absolutely dismal, reflecting the sharp decline in household and investment spending following the failure of Lehman in September. The December employment report fit right in, showing a large loss in jobs. Some of the weakness is directly attributable to the reduced availability of credit and the rest to the sudden move to caution by households and businesses in the wake of the meltdown in credit markets. Economic momentum is strongly to the downside. However, lower oil prices, a large fiscal stimulus package, and a bottoming of the housing market should come together to form the basis for an economic recovery.
The decline in oil prices that already occurred is dumping about $500 billion (after-tax) into consumer wallets, a huge infusion of cash. The fiscal stimulus package may be worth roughly $800 billion more, but it is likely to be spread over two years, so it is really be worth about $400 billion annually. Third, home construction is running well less than 50% of the population's growth needs. So, inventories are falling rapidly and a rebound should occur fairly soon, which should also be significant psychologically. Other lesser factors are also aligning to help. Mortgage rates have declined to the lowest levels of the past 30 years, so just about everyone who can qualify should be able to refinance at lower rates. Deferred spending should pick up, once confidence returns. For example, the nation's auto fleet is rather old and aging, while depreciation of the stock exceeds new purchases, which is causing the auto fleet to shrink. As conditions improve, auto sales should rise significantly. And a recovery from such a wide variety of sectors should be mutually reinforcing.
Central to everything is that credit market conditions must improve. I repeat this remark often because without an improvement in credit, spending should remain depressed and recovery prospects would remain poor. Policymakers seem to share this view, since the Fed and Treasury are doing everything possible to restore markets to normal. Indeed, risk spreads are declining across the board, corporate bond issuance has picked up, and mortgage refinancing has surged. So, credit market conditions are improving. Improved household cash flow, government stimulus and improvement in housing should then find favorable conditions for an economic recovery. In the meantime, at least for next few months, economic reports are likely to remain very weak and even scary. The real tests for recovery prospects will not occur until spring, however.
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