If a rising tide lifts all boats, then what does a receding tide do to boats – or the economy as the aphorism often goes? Well, it leaves them high and dry and that’s exactly what some economists fear is in store for the U.S. economy and consumers if job creation remains low, consumer spending does not improve (notwithstanding the record set on Black Friday) and home prices don’t finally stabilize, let alone actually increase at some point. As economic recoveries go, the current one looks anything but typical now that we’re well beyond the end of the last recession as of June 2009 according to Bloomberg.
Four Years Later and We’re Still Waiting
The data is difficult to deny. The end of the third quarter brought the revelation that gross domestic product (GDP) had risen a miniscule 0.1 percent since before the recession in 2007. That’s four years now since we’ve had sustainable economic growth, let alone a rising tide of any sort. The four year figure is important because it coincides with a weak recovery in production – in fact the weakest since World War II. Another yardstick that has gone by the wayside is the often-quoted “every recession has been followed by a recovery that surpasses its previous high-water mark within two years”. Not this time. The drag on the recovery from unemployment is huge, there are now fewer people working than in April 2000. Mind you that in 2000, our population had 31 million fewer people. The current rate of unemployment hovers at 9 percent, down from its high of just over 10 percent, but still about 4 percent above the rate before the recession took hold in December 2007.
Lower Prices Can’t Be A Bad Thing. Can They?
What do falling homes prices, lower wages, cheap stocks and near-zero Fed interest rates have in common? In a word, deflation. In two words, deflationary spiral. You get the picture. The housing market has been brought to its knees since 2007 and the current Case-Shiller report indicates that several large cities are now at price levels not seen since 2000. A home is usually the most valuable asset that a person possesses and since home values have decreased on average 31 percent since 2007, people have less wealth. And with the decrease in value comes another problem for some consumers – owing more on their mortgage than their home is presently worth. This is the position that 22.1 percent of people are now in according to a report by CoreLogic, a data provider of financial, property and consumer information.
What is the Answer?
We need more jobs that pay better wages that enable people to spend more money to lift the economy out of the rut that it’s in. We need prospective homebuyers who are currently too afraid to buy now, because they fear that home prices will continue to drop further – to bite the bullet and buy now. We need businesses to more closely manage productivity by watching consumer demand and balancing worker’s weekly hours and wages so that as more capacity is utilized that supply does not outpace demand and prices fall as consumers decide to save money and postpone purchases. Think auto industry in 2009 and 2010. Let’s learn from Japans last 10 years from the mid-1990’s to about 2006 when interest rates were zero, inflation was non-existent, wages kept falling as did stocks and Japan struggled to find a way out of its crisis. Sound familiar? We do have some advantages over Japan. We have their example of what not to do and we have the inherent strength of our innovation and productivity and as the currency of last resort – U.S. Dollar – we have the ability to borrow lots of money at very low interest rates to help fund our recovery. Or at least to get the tide to rise up a few inches.