Robert CaldwellWhen will the economy rebound?
June 9th 2008 17:34
An unprecedented combination of events has led to the current economic climate, which some deem as a recession. The economic slowdown began with the downturn in the housing market. Price and sales growth shrank to the point where builders began walking away from projects. Building permits and housing starts took a tumble in response. As prices slid further, interest rates reset and many borrowers (especially those considered subprime due to their weak credit status) were not able to afford their mortgage. In response, mortgage lenders tightened their lending standards across the board. The housing-related credit problems slowly seeped into financial markets causing a credit crunch—a situation where highly rated business had trouble obtaining financing. The volatility was evident in most financial markets.
As corporations scaled back capital investment, they also scaled back hiring. Layoffs have been pervasive over the past few months.
The average consumer has also suffered at the hands of high oil and food prices. Moreover, homeowners have no longer been able to tap into their mortgage equity for cash. Consumption has declined as all these factors came into play.
Government has attempted to offset the slowdown, but has had little success. State and local governments have increased hiring, but have been hit hard by lower tax revenues, primarily due to the decline in property and sales taxes. The increase in costs from public sector hiring, unemployment benefits and the stimulus package will only exacerbate budgetary issues down the line. Nevertheless, the stimulus package should provide a bit of a cushion to at least temporarily offset the rising prices. Nevertheless, it won’t be enough to pull us out of the current situation.
I expect the situation to worsen over the next two or three months until another federal response is solidified. Once a new plan is passed, we can expect things to start to turnaround on the economic front. The reason I believe things will turn around is three-fold:
1. The housing market appears to be stabilizing. This is what got us into this mess; a turnaround or even stabilization could help get us out. I know the labor market is somewhat scary right now, but that is a lagging indicator.
2. I believe that inflation (rising prices) will become less of a concern over the next few months. First, Memorial Day is typically the worst time of year for gas prices. Second, as economic growth slows, theory says inflation should subside… unless we are witnessing stagflation… which I don’t believe to be the case.
3. Things typically turnaround in a recession once government intervenes and secures confidence. I don’t believe the stimulus checks were enough to secure confidence. Something further is needed. Typically, once government intervenes the intervention wasn’t even necessary. It’s the “talk” and “clamor” for intervention that ensures private enterprise and restores consumer confidence.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
As corporations scaled back capital investment, they also scaled back hiring. Layoffs have been pervasive over the past few months.
The average consumer has also suffered at the hands of high oil and food prices. Moreover, homeowners have no longer been able to tap into their mortgage equity for cash. Consumption has declined as all these factors came into play.
Government has attempted to offset the slowdown, but has had little success. State and local governments have increased hiring, but have been hit hard by lower tax revenues, primarily due to the decline in property and sales taxes. The increase in costs from public sector hiring, unemployment benefits and the stimulus package will only exacerbate budgetary issues down the line. Nevertheless, the stimulus package should provide a bit of a cushion to at least temporarily offset the rising prices. Nevertheless, it won’t be enough to pull us out of the current situation.
I expect the situation to worsen over the next two or three months until another federal response is solidified. Once a new plan is passed, we can expect things to start to turnaround on the economic front. The reason I believe things will turn around is three-fold:
1. The housing market appears to be stabilizing. This is what got us into this mess; a turnaround or even stabilization could help get us out. I know the labor market is somewhat scary right now, but that is a lagging indicator.
2. I believe that inflation (rising prices) will become less of a concern over the next few months. First, Memorial Day is typically the worst time of year for gas prices. Second, as economic growth slows, theory says inflation should subside… unless we are witnessing stagflation… which I don’t believe to be the case.
3. Things typically turnaround in a recession once government intervenes and secures confidence. I don’t believe the stimulus checks were enough to secure confidence. Something further is needed. Typically, once government intervenes the intervention wasn’t even necessary. It’s the “talk” and “clamor” for intervention that ensures private enterprise and restores consumer confidence.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
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