11 Reasons Why The Economy Is Going to get Worse Before It Gets Better

Anyone expecting a quick recovery in 2009 is going to be unpleasently surprised. Here are 11 reasons why the present economic crisis will persist for quite some time to come.

1. Consumer spending is in freefall. Like it or not, spending money is what makes our economy grow. Less consumption means less demand, which in turn means fewer jobs and less overall wealth. Consumer spending dropped by 1% in October (the latest month of data at the time of writing), the biggest single fall since the 9/11 attacks.

This trend is unlikely to reverse itself any time soon. From Reuters:

In a survey over the weekend by America’s Research Group, 44 percent of 1,002 respondents said they would further cut spending after the holidays. That’s about twice as many people saying so as is typical in the survey, America’s Research founder and Chief Executive Britt Beemer said.

Among the respondents, 37.6 percent said they would spend less dining out and 20.2 percent said they would spend less on entertainment. The restaurant industry is already among the hardest hit by the recession.

An RBC Capital Markets survey this month showed a record 51 percent of consumers said they would spend less at restaurants over the next 90 days compared with the previous 90 days.

2. Unemployment is rapidly increasing and shows no signs of slowing. The official unemployment rate is currently at 6.7%, the highest it’s been since 1993. I say ‘official’ because some sources believe it to be much higher.

The government’s unemployment figures only count people who are actually drawing unemployment benefits. They do not count those whose benefits have run out, those who do not qualify for benefits, those who never applied, or those who are ‘underemployed‘. Some sources estimate the real unemployment rate to be well over 12%.

3. Banks are not lending. It sounds counter-intuitive because an excess of debt is what got us into this mess in the first place, but many businesses need easy access to credit (and for consumers to have easy access to credit) to keep operating. A tightening of the credit markets, or a ‘credit crunch’ as the mainstream media has dubbed it, is very disruptive to the economy.

It was perhaps for this reason more than any other we were scared into ‘lending’ the big banks hundreds of billions of dollars, and in the end they just wound up hoarding it. Showing mind-boggling contempt for taxpayers, some of them even planned to use it to buy up smaller banks.

At any rate, the bank bailout has thusfar done nothing to improve access to credit to either businesses or individual consumers.

4. The Fed is running out of places to move. Just yesterday the Federal Reserve cut the funds rate to between 0% and 0.25%, meaning it now has virtually no other way to get the credit markets moving again, short of actually lending out money themselves. Incidentally, things are so desperate right now that they’re doing that already.

The bottom line is, the Fed has pretty much pulled out all the stops. There’s not really a whole lot more they can actually do, and any hopes of a ‘soft landing’ have gone out the window.

5. The property market has still not bottomed out. If you think the worst of the housing price crash is behind us, think again. House prices plunged 8% this year, and so far there are no signs of a protracted recovery.

All this is despite mortgage rates being at 50+ year lows – see this excerpt from a VOA article below:

Mortgage rates are falling with 30-year home mortgages available at interest rates over five percent. Hoey told Bloomberg Television he expects rates will fall further. Rates haven’t been below five percent since the 1950s.

But low rates have not yet stimulated the depressed housing market. New home construction in November fell 19 percent to its lowest level since 1959. Foreclosure filings in November were 28 percent higher than a year earlier and some 12 million Americans now have mortgage balances bigger than the market value of their homes.

6. International trade is plummeting. The Baltic Dry Index (or BDI) is a measures the cost of moving goods by sea. When international trade is booming, cargo ships are in short supply and consequently the BDI soars – and vice versa.

In May 2008 the Index peaked at its highest level since being introduced in 1998, reaching close to 12,000 points. Today the Index stands at a mere 830 points, losing well over 90% of its value in a mere 7 months and putting it back to a level not seen for a decade.

7. Consumer confidence is nearing an all-time low. For those who don’t already know, consumer confidence is basically a measure of the degree of optimism people have towards the economy. Low confidence means less spending and all-round belt tightening.

The University of Michigan keeps this thing called the ‘Consumer Sentiment Index‘. It’s been measuring consumer confidence for roughly 50 years now, and story that the latest data is telling is disconcerting to say the least.

What it shows is that consumer confidence has dropped to a level not seen since 1981, and is still in freefall. Check out the raw data here, but be warned: the site isn’t particularly easy to navigate.

8. The effects of the bailouts are still unknown. Over the past 12 months, literally trillions of dollars has been pumped into the economy, and there many more trillions to come over the next 12. Despite what the politicans and bankers tell you, there’s really no way to know how this will effect the economy, and it will take some time for that ‘new money’ to make its way through the system.

This great excerpt from an article on Yahoo! News should give you an indication of the scale of these bailouts:

According to Bianco Research President James Bianco, who crunched these numbers, that amounts to more government aid and assistance than nine other historic bailouts and big government outlays combined.

The New Deal, for instance, cost an estimated $32 billion in its day, which would be about $500 billion in today’s dollars. The Marshall Plan cost about $12.7 billion, which is the equivalent of a paltry $115.3 billion. The Louisiana Purchase? The French got $15 million, which would be worth about $217 billion today.

If you take those three items, add in the adjusted costs of the Race to the Moon, the savings and loan crisis, the Korean War, the Iraq war, the Vietnam War and assistance for NASA, you still get to just $3.92 trillion – not even half of the taxpayers’ exposure today, according to Bianco.

If that weren’t enough to make you want to upgrade your holiday gift list, it’s useful to remember that Congress isn’t done and President-elect Barack Obama’s team hasn’t even started.

9. Obama’s stimulus plan is insufficient. I like Obama, and I think a wise infrastructure spending plan is a great way to get things moving again, but even the $900 billion stimulus package he is planning may be insufficient to turn the tide.

Among other things, the plan is supposed to create ‘up to’ 2.5 million jobs. Sounds like a lot, until you realize that the US economy is currently hemmoraging hundreds of thousands of jobs every month – 533,000 in November alone.

10. The stability of the overall financial system is questionable. This is not your run-of-the-mill economic contraction, this is an economic earthquake that is shaking the very foundations upon which the global economy rests.

Many of the actions taken by governments and central banks around the wolrd over the last 12 months have been wholly unprecedented, and no-one really knows how these moves will change the rules of the game. =

11. This is no ordinary recession. According to the National Bureau of Economic Research (NBER), the US officially entered recession in December, 2007, meaning we are now approaching the 12 month mark. This already makes it 50% longer than the 2001 and 1990 recessions (both 8 months in duration), and makes it the second most serious economic contraction since 1937.

So when will things start picking up again?

No one knows, and anyone who claims they do is either delusional or a liar. The economic malaise after the crash of 1929 lasted nearly four years, the all but forgotten depression of 1873 lasted nearly six. While it’s a pretty fair bet that we’ll get our act together faster than that, 2009 will not be an easy year for anyone but bankruptcy attorneys and liquidators.

3 thoughts on “11 Reasons Why The Economy Is Going to get Worse Before It Gets Better”

  1. The nightmare we are living with regard to the economy is 40 years in the making:

    “The United States of America has not had a trade surplus since 1975. We have not had a trade surplus with Japan since April, 1976. Every year since 1983 we have been in deficit with Europe. The last time America had a trade surplus with both Russia and China was a very brief period during the Cold War. We have been running ever increasing trade deficits with South Korea since 1998. Our 1993 trade surplus with Mexico is now a 100 billion a year trade deficit. In the 1970’s, 80’s, and much of the 1990’s our trade deficit was never more than one half of 1% of GDP. We now find ourselves with a trade deficit of between 5% and 7% of GDP depending on how you count. From 2002 to 2007 the trade deficit exploded. The only reason unemployment stayed well under 6% is because of the credit bubble. 63% of all jobs created from 2000 to 2006 were housing or credit bubble related. We did not feel the destructive affects of the trade deficit because of this credit bubble. I have concluded from work I have been doing that America will never get unemployment even under 7% with a trade deficit of over 3% of GDP, without a major credit bubble. The U.S. Economy has actually stopped functioning like a real economy. We literally need a credit bubble to function. America must move from the ideology of free trade to the economic policy of balanced trade. Until this structural shift takes place you can bank on the American economy being the laughing stock of the world economy.”
    -Ames F. Tiedeman

  2. Wow, thanks Ames – that’s a very detailed summary! I think one of the most important ways we can counter the economic recession is by taking individual action to live more frugally. If we take a few basic steps like comparing car insurance policies before we buy, we can all spend a little less and ease off on the economic pressure.

  3. Lower taxes? Higher taxes? Does anyone actually think being plus or minus 5% on taxes will make a lick of difference for the U.S. economy at this stage in the game? The economy will never again work the way we all want it to work with the current account deficit at 6 or 7 percent of GDP. You cannot get unemployment even under 6% without a credit bubble, with a current account deficit as large as ours. We have not had a trade surplus since 1974. We have been in decline for 40 years and this decline has only accelerated in recent years. We closed 55,000 plants in the United States since 1980. Your politicians won’t tell you this because some of them fed you the false promise of free trade. Others don’t want to admit NAFTA has been a complete failure for America. Great for Mexico as that giant “sucking sound” Ross Perot predicted has materialized. Clinton and Gore promised the American people ever bigger trade surpluses with Mexico and ten’s of thousands of new high paying jobs. Just pass NAFTA they exclaimed! Quite laughable, really. We have gone from a trade surplus of a few billion a year to a trade deficit nearing 100 billion per annum with Mexico. What is equally as laughable or insulting is the trade deal Obama has just signed with Columbia. Do we make anything they can afford? Of course not. Columbia will simply become a new launch pad to make textiles and sell them into America. How about the trade deal Obama signed with South Korea? This is an interesting one. Within the bill on the U.S. side is a provision to provide worker training for displaced Americans. So we are now so stupid that we are signing trade deals that we know will diminish the U.S. labor force. The insanity is just that! Does anyone think the South Koreans would agree to a trade deal if they were not sure to win? Does Obama understand that the South Koreans are fierce nationalists who will never let America win a trade contest? Did my ancestors lead pre-Revolutionary War skirmishes against the British at Lexington and Concord in 1775 and early 1776 only to have America end up how it is today? My blood has been on this land since 1635. How many of my ancestors ever dreamed that America would be so deep in debt and short on ideas? Would any of them ever have thought that such mediocre men would one day be leading this nation? America has done a terrific job of creating a low employment and low wage society, for millions. Quite sad indeed. No civilization has succeeded by consuming more than it produces. We must massively restructure. Until America decides to produce what it consumes you can forget about any long term economic recovery. The financial games all failed. The credit bubble is gone and now the U.S. economy is exposed as the biggest joke of all time. Credit bubbles have a way of masking the real issues. How do we fix the American economy? Start by making every American who has received a Nobel Prize in economics return the award. Why? because they were either 100% wrong or their work proved to be of no benefit to the American economy. Next, round up every economist who advised Nixon that if America left the gold standard and moved the world to a floating currency regime; that America would never, ever, run a current account deficit. And I am very sorry to inform everyone that this would include the late and great Milton Friedman. Sorry Milton, you were dead wrong too! Next, leave the WTO, end NAFTA, and go about setting up country-by-country trade deals that are realistic based on where America stands today. It is not 1955 anymore. The world has either matched us or surpassed us in industry after industry. We have literally become an emerging economy is some industries as we have faltered so badly. Next, move to a flat tax, and end all farm subsidies. Cancel most government social programs like food stamps and deport 100% of the people living in America illegally. Make it a high crime to employ anyone not here legally. Finally, for major industries such as steel and automobiles, move to a must-be-made-in-America policy. No longer allow imports of products in specific industries. They must all be made in America. We must employ our people. We can no longer employ the world via our consumption as so many Americans remain unemployed. We must use our 50 state union to our advantage. We must promote massive trade between the states. We must socialize CAPITALISM to avoid becoming a socialist state! We must reinvigorate the American people. We must manufacture. And who running for office can lead America on this grand and pious endeavor? Who running for office today has the passion of a General MacArthur or the skill of a Chester Nimitz? Who has the energy of a Teddy Roosevelt? The men who command the attention of the electorate in this age of mediocre ambition are all too small to make a difference…

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