There’s no use trying to pretend now. The economic news that poured out last week is ample evidence that the US economy is in a recession. The headline news on the job losses told the story loud and clear and what will follow will be a steep decline in corporate profits which will really be serious losses for many companies and industries, not just the beleaguered automobile sector of the economy.
The unemployment rate shot up to 6.5% but it is a lagging indicator, so it is for sure going a lot higher - 7%? For sure. 8% More than likely. We have not seen numbers like that since the early 1980s. All one can say is that it is better than the 10% that many countries in Europe live with on a perpetual basis. And if there is a small silver lining on the issue of unemployment, it is in globalization. Just as many new jobs were created in Asia and elsewhere outside the US over the last ten years, as our demand dwindles for products, it will be those foreign jobs that will be terminated. We exported jobs and now we are exporting unemployment.
Meandering through retail stores over the weekend, I was bombarded by “40 – 60% OFF” sale signs, and it is not even Thanksgiving. That may stir consumer buying (and I will admit to being surprised at how full some stores were) but there won’t be much in the way of profits associated with those sales. And after Thanksgiving, the discounts will get even larger.
“Bleak Night at Christie’s…” was the New York Times headline for an article detailing the firm’s disastrous auction this past week. The sale brought in $47 million instead of the expected $104 million low estimate. Fully 30% of the lots did not even sell. That tells me that even deep pockets are reluctant to spend.
Trickle down economics is often derided in the political arena as an excuse to cut taxes for the ‘rich’. But trickle down is happening right now as middle income people are cutting back on things they have come to accept as necessities: their house cleaners, their hair appointments, their lawn services, their manicures, their driving. All of these cutbacks will lead to further consumer spending reductions.
Unfortunately I cannot find a way for this recession to be anything but long and deep. It is true that we can expect a major stimulus package from Congress over the next few months, but that does not counter the reality that consumers have far too much debt and will need to pay it down. Debt reduction is not a stimulus for growth; it is a hindrance to growth. 2009 will be a miserable year for the economy and for corporate profits. But the stock market will lead the economy by six months or more, so with a little luck if the recession tunnel is not too long, there will be new life in the stock market.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.