US economic recovery will be slow

Published: Wednesday October 8, 2008

Now that the Government has decided it will spend US$700 billion to get the US economy started again, don't expect immediate results.

It's a little bit like those ads for protein drinks that show skinny milquetoasts turning into Schwarzeneggers in 60 days - you want it to be true, but you know in your heart it will take months or years of sweating in the gym to pack on that kind of muscle.

The latest readings on the US economy show just how far we have to go. Home prices and auto sales are plummeting, manufacturing activity has tumbled and the consumer is feeling increasingly strapped.

The economy seems nearly dead, and things could get worse before they improve - even with Washington's help.

Much attention has been paid recently to the wrangling over the taxpayer-funded emergency rescue package. As it should. That's enough money to give every man, woman and child in the US about US$2,325 each.

Lawmakers say the bill is the best hope to save the financial system and revive the economy. It would allow the Government to buy bad mortgages and other devalued assets held by troubled financial institutions, thereby inducing them to lend again to businesses and consumers instead of hoarding their cash.

The package, which was approved by the Senate on Wednesday last week and the House last Friday, would also include tax breaks for companies and the middle class.

History tells us not to expect miracles overnight. After the last big US bailout - the formation of the Resolution Trust Corp. in 1989 to stop the US savings and loan crisis - it took a year for the stock market to hit bottom, two years for the economy and three years for the housing market, according to Merrill Lynch.

And when Japan put a bailout plan in place in the late 1990s, its stock market took another five years to recuperate. By some measures, its economy still hasn't had a sustainable recovery, according to Merrill's chief North American economist, David Rosenberg.

Standard & Poor's global investment policy committee, in notes from its weekly meeting, said that even with a rescue plan "cascading concerns remain."

"Will it be enough to accomplish the required task of unfreezing credit markets? If so, are we just back to recession 101?" said the group of the firm's senior investment advisers.

The bailout doesn't even attack one of the biggest problems for our economy: The housing sector. Government officials from Treasury Secretary Henry Paulson on down have said the economy won't recover until housing does.

Falling home prices were behind a wave of foreclosures that pushed many banks to take multibillion dollar writedowns and some banks to fold or be rescued by the government or rivals. The contagion from that caused a crisis of confidence in the banking system that has led lending to freeze between banks and other banks, and to businesses and people.

Home prices tumbled in July by the sharpest annual rate ever, a 16.3 per cent year-over-year decline, according to the latest reading from the closely watched Standard & Poor's/Case-Shiller 20-city housing index. That was the biggest pullback since the index's inception in 2000, and represents a 20 per cent decline in prices since the peak in July 2006.

As weak as this report was, it also didn't reflect the most recent turmoil in the financial markets at the end of the summer. Since then credit conditions have tightened significantly.

That showed up in the awful September auto sales. Ford Motor Co., Toyota Motor Corp and Chrysler LLC all posted steep drops of more than 30 per cent.

Americans are turning increasingly cautious about spending and are buckling under the burden of excessive debt. Citigroup Inc. now anticipates surprisingly large credit losses of up to US$10 billion - a 30 per cent rise from the second quarter - due in part to its credit-card holders not paying their bills.

The jobs outlook is dimming by the day. New applications for unemployment benefits are at a seven-year high. Employers slashed payrolls by a bigger-than-expected 159,000 in September, and the unemployment rate held steady at 6.1 per cent, according to a Labour Department report last Friday.

Manufacturing activity has fallen off a cliff. After looking resilient for months, the September survey by the Institute for Supply Management showed manufacturing was at its the lowest since after the Sept. 11 terrorist attacks. It was the biggest one-month decline since January 1985.

"Such a big drop would be remarkable under any circumstances, but the element of surprise in this report was especially big because there was no warning of it," said Ian Shepherdson, chief US economist at High Frequency Economics.

All this gloomy data is convincing economists that a recession is upon us, with gross domestic product possibly contracting in the third quarter for the first time in this economic downturn.

They say the Federal Reserve might have to lower its overnight bank lending rate, which has already gone from 5.25 per cent to 2 per cent in the last year. Fed Chairman Ben Bernanke and his colleagues may even have to make that move before the central bank holds its next regularly scheduled meeting on Oct. 28-29

Even if they did cut the key rate, many economists believe it won't have a lasting effect unless lending begins to thaw.

Until then the wait continues, and the economy will suffer more.


Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business_mag?id=161384848