An Economic Recovery That Whimpers
Senior Features Editor
Economists typically say every recession is different in its own way, but recoveries are all alike, namely that they are driven by the housing sector and consumer spending.
If so, this recovery may be on very shaky ground.
Consumer spending, which roughly accounts for 70 percent of economic activity, and housing, about 20 percent of GDP, have been hit with the equivalent of 100-year storms.
"Is the consumer back in the game? No, not yet," says John J. Castellani, chief economist and president of the business roundtable.
"When we look at our members who are tied to the housing market, they are nowhere near a recovery, while our [consumer products] companies are still moving to downscale."
Those companies are doing business in a very different landscape than that of three years ago or in past recovery periods.
Between June 2007 and December 2008, for instance, inflation-adjusted personal wealth fell by 22.8 percent — the most since the Federal Reserve began collecting data almost 60 years ago. Some $6 trillion in housing wealth alone was lost in 2008. Consumer spending shrank for two consecutive quarters for the first time in half a century.
"Consumers simply have to retrench, save more, spend less," says David Jones of DMJ Advisors. "That in itself will give us a much slower, longer and uneven recovery."
No wonder, then this recovery is looking more like the exception rather than the rule.
"In previous recessions, with stimulus programs, orders in housing get underway, they start to create a little confidence, banks start to lend more, consumers start to borrow more, " says Barbara Marcin, a portfolio manager with Gameco Investors. "I don't think there are any signs of that."
Though housing may be showing signs of stabilizing recently, skeptics say that hardly means a near-term rebound.
Housing starts, as well as new and existing home sales, have all posted three consecutive monthly gains, but those all followed ultra-depressed levels in January, and are basically back where they were six months ago. New data this week is likely to reflect that mixed picture.
"I don’t think it's fair to make a lot out of it," says Gerald M. Howard, CEO of the National Association of Home Builders. "It shows we hit bottom or may have hit bottom."
New home sales, as of June, are half of what they were in 2007; housing starts are 30 percent of what they were at their 2006 peak. Existing home sales, which are benefiting by a sugar-high boom in foreclosures, are running 25 percent below their 2006 high and are still lower than a year ago. Prices are down 15 percent from a year ago.
Howard says if there is a housing recovery underway, "it is very one dimensaional," driven by lower-end, first-time homebuyers, which doesn't have a "ripple effect" on the economy.
Retail sales, which disappointed in July, are at mid-2005 levels, way off their 2007 peak. Spending on furniture and household furnishings is back to where it was in 2001. The building and garden materials category is at a five-year low; autos an 11-year low.
"Instead of the consumer being at the leading edge, in this case, it will be very much a lagging piece" of the recovery, says Richard Hastings, consumer strategist at Global Hunter Securities, citing "the threat of unemployment, the absence of the housing-market wealth effect, and the debt overhang primarily because of the deterioration of home equity."
If so, a powerful ingredient will be missing. In all but the 2001 recessionary period, when housing never really contracted, it was a clear driver in recovery periods. Residential investment, a key category of GDP, rose an average of 20 percent, the first two years of the recovery period. In the aftermath of the 1991 contraction, it averaged 10 percent in the 1992-1994 period, before taking off in what is now the longest peacetime expansion of the economy in US history.
In all of those recovery periods, personal consumption was close to or exceeded the general economic growth rate.
"The underlying drivers are weak—employment, wages and salaries; the wealth generation part of the economy has to kick back into gear," says Brian Bethune, economist at IHS Global Insight. "The services sector is tied into overall consumption activity. If housing remains weak, services will suffer."
Some of the initiatives of the Obama administration's stimulus plan—from tax rebates to the cash-for-clunkers program to a homebuyer credit—are conventional tools meant to spur consumption, particularly of durable goods. But consumers appear reluctant to shake their new fiscal austerity.
Some economists say the consumer pullback is close to over, following a one-time upward adjustment in their savings rate.
And one economics professor sees as the formation of a bottom in housing, which means a largely traditional recovery is in the wings.
"In this recovery, consumers will make their adjustment, save more, and consumption will grow gradually," says Peter Morici of the Robert H. Smith School of Business at the University of Maryland.
Yet even quasi-optimists like Morici admit things are a bit tenuous.
"We're either going to have a fourth-quarter or first-quarter recovery or not at all," he says.