Consumers hoping that the worst of the recession is over may be setting themselves up for disappointment as the US economy continues to deteriorate, a panel of economists and financial experts said Tuesday.
Surging unemployment and the slow-moving impact of the government stimulus program will stall any real economic recovery until 2010 or even later, the panel said. Consumers fearful of losing their jobs are likely to continue to spend less while the housing and financial crises continue to unwind.
"I'm fairly pessimistic about the near-term future," said Dean Baker, co-director of the Center of Economic and Policy Research in Washington, D.C. "I can't imagine a situation where unemployment doesn't go to 10 (percent). My guess is we're going to cross 11 by sometime next year."
The Conference Board's consumer confidence index jumped in April to the highest level this year, reflecting consumer hopes that the economy is nearing a bottom even if the index itself shows the economy remains weak.
But speakers at a New York State Society of Certified Public Accountants briefing said the future remains murky.
Government officials' talk of "green shoots" in the economy—a term introduced several weeks ago by Fed Chairman Ben Bernanke and which optimists have used widely since—was highly premature and even irresponsible, Baker said.
"Economically and politically I thought it was poor judgment by the Obama administration to start talking about that," he said. "If I were President Obama I'd be very worried about this. You don't want to be the one saying my program is working and four, five months out there unemployment is really bad and they're going to start blaming you."
There are a number of ways to measure economic growth and tax revenues that are high on the list for government officials. By that standard, the current economic picture is anemic in many regions.
"Sales taxes have dropped off a cliff," said Nassau County (N.Y.) Comptroller Howard S. Weitzman. "The fourth quarter—it's like everybody got a Twitter: Stay home, don't buy."
The news hasn't gotten any better in 2009, with sales tax receipts down 10 percent year-to-date, he said.
Falling sales tax revenues are a direct result of consumers' unwillingness to spend money, something Weitzman said has pervaded his county even as unemployment and foreclosure rates there remain well under the national numbers.
"People are putting their money away, paying down debt, paying off credit cards, doing whatever they have to to get their households in order," he said.
"They're marshaling the resources they have because of that uncertainty," added John D. Finnerty, professor of finance at Fordham University.
The US will not be able to depend on other nations to rescue its economy, Finnerty said.
Aggressive government stimulus, a rebound in consumer spending, and the continued reduction in business inventory will be needed for recovery. But when that happens is anyone's guess, he said.
"In order for the economy to (recover) a lot of the stimulus is going to have to come from consumer spending and government spending, and it's hard to know when that's going to kick in," Finnerty said. "It's going to take into 2010 before we work off that excess inventory and government spending starts to kick in."
"The federal government's the deep pockets in this story," Baker said. "They really have to bear the burden because there's nobody else out there."
The discussion, however, was not all doom and gloom.
While no one was willing to green-light the economy, they said consumers probably won't need to worry about inflation becoming a major problem, and there even was some sentiment that fears of unemployment could be overblown.
"Don't get spooked by it--it's going to go up," said Timothy P. Speiss, partner-in-charge at Eisner. "The economy will do better while, counterintuitively, unemployment goes up."
Speiss said that in past times of unemployment reaching comparable levels it then decreased to between 5.8 and 6.2 percent within 24 months.
Much of the panel's discussion also focused on the root causes that led to the financial crisis.
They agreed that the crisis arose primarily due to profligate lending to underqualified customers and a lack of common-sense regulatory practices.
A likely result, then, will be a tightening of rules under which banks can operate, particularly as it concerns capital ratios. Banks are likely to be forced to keep a higher amount of money on hand compared to how much they lend out.
"The government was extremely aggressive in promoting mortgages on terms that were probably not appropriate," Speiss said.
While there's only limited sentiment for over-arching government involvement with banking practices, there's been a clear call for more common-sense regulation.
"The market system can work. What regulation does is it establishes the rules of the game," Finnerty said. "The rules of the game were much too permissive."
