What the Double Dip Recession Will Look Like – Part 2

What the Double Dip Recession Will Look Like

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This is a great article that sums up how we got to where we are currently with the economy, what people are thinking about the economy and what’s likely ahead for us.

http://finance.yahoo.com/career-work/article/110344/what-the-double-dip-recession-will-look-like

Here are the points I came away with (most of this text comes right out of the article):

• Nearly two-thirds of Americans believe the economy has yet to hit bottom

• A growing and vocal minority of economists believes that there will be a double-dip recession primarily because of the intransigence of high unemployment and the rapidly faltering housing market.

• The cause of the 2008-2009 recession:

? The first trigger was the drop in housing prices, which robbed many people of their primary access to capital. As that access disappeared, so did the availability of credit. Consumer buying power evaporated and business cut inventory and production. Joblessness rose. Finally, consumer confidence plunged.

• Over 17% of the official unemployment numbers, or 1.4 million people, have been out of work for over 99 weeks, nearly 2 years.

? they are no longer eligible to receive unemployment insurance benefits, unless congress extends benefits again – which just adds to this problem.

• Unemployment claims are running well above expectations, and recently hit a six-month high.

? There is nearly no jobs creation in the private sector.

? Real estate prices continue to drop, particularly in the hardest hit regions such as California, Nevada, Florida and Michigan.

• The federal, state and local governments are in no position to lend assistance to businesses, most of which lack access to capital.

• Banks are not prepared to lend to small businesses, especially those with modest balance sheets and relatively low sales. This presents a problem for employment since companies with less than one hundred workers have traditionally been the largest creators of jobs.

• The second dip of the recession that ended in 2009, according to economists and the federal government, is likely to begin within the next two quarters if certain conditions are met:

? These conditions weren’t given, but it’s pretty obvious that the lack of recovery in key areas, like jobs and housing, are critical to a recovery.

What a double-dip recession would look like (article text in quotes):

1. Housing:

? In those areas where housing prices have already dropped 50% or more, prices will continue to fall.

? It’s in these areas where the unemployment will be the highest and local governments will have an increasingly more difficult time providing basic services.

? Real estate values could drop another 20%.

? in areas that have not been hit as hard, the “protracted unemployment and the unwillingness of banks to lend would make otherwise attractive all-time low mortgage rates unappealing.”

2. Unemployment

? Unemployment quickly increases back to above 10% (just think what the U6 number will be!).

? This recession will be worse than in 1982, as we lost a large portion of our manufacturing base over the past 3 decades.

? “Many Americans who worked in manufacturing before the recession cannot be retrained, and the factories where they worked will not be reopened. Many companies have recently adopted the policy that they will keep as much of their work-force temporary for as long as possible. This keeps the cost of benefits low and allows firms to fire people quickly and without severance. A hiring strike by American businesses would contribute to putting 200,000 to 300,000 people out of work per month.”

? Here’s a video on the progression of unemployment:

? http://www.youtube.com/watch?v=9ssIhiD8kKM&feature=player_embedded

3. Consumer Spending

? “One of the primary reasons that consumer buying activity did not grind to a halt at the beginning of the last recession was that people still had access to a huge reservoir of home equity loans, most of which were taken out at the peak of the real estate market in 2005 and 2006.”  This is now gone.  IOW, people had some sort of savings, albeit these savings were part of their mortgage.

? “The New York Times recently reported that ‘lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same.’ ”

? With 24% of all national mortgages, or 11 million, being under water, and many more close behind, there is no more cushion left in the equity people were using.  As the economy continues to deteriorate, more and more people will have no place to turn for capital (or personal funds).

4. Consumer Confidence

? As the economy worsens, the confidence that people have in the US economy will plummet.

5. Auto Industry

? “People concerned about employment will defer car purchases.”

? “Auto sales, one of the primary barometers of consumer economic activity and manufacturing output, would probably drop back to recession levels.”

6. Trade

? “The nominal balance of trade would almost certainly drop, probably to a deficit of $25 billion a month, as the U.S. takes in fewer imports due to low demand for consumer goods and business inventory. Exports would also drop because an economic crisis in the U.S. would spread quickly worldwide.”

7. Budget

? “The budget deficit would grow beyond the $1.5 trillion it should reach this year. ”

? Tax revenue will drop from both businesses and individuals.

? “As states run out of money to cover benefits, more of the burden could fall to the federal government.”

8. National Debt

? “The rise in the deficit and a rapid increase in the American national debt would cause concern among the capital markets investors who purchase U.S. Treasuries. ”

? With more spending creates more borrowing.  The more borrowing that occurs, the more likely that the government’s debt rating goes down.  The lower the rating, the more expensive it becomes to borrow, if at all.

9. Stock Market

? Based on performance of the last recession (2008-2009), the S&P500 would drop about 38%.  Expect similar performance from other markets.

? “This would take trillions of dollars off business balance sheets and from consumer retirement and brokerage accounts.

? “Businesses would become less likely to invest in new plants, equipment and services. For individuals, many would see a large part of their retirement disappear.

? “That would cause a huge drop in consumer spending as people attempt to preserve cash, perpetuating further drops in the stock market.”

10. Banking

? Catastrophic.

? “Particularly at the regional and community bank level where a number of home and commercial real estate loans are held.”

? As more banks close, the FDIC would be forced to borrow more money from the Treasury to cover the closings of these failed banks.  This borrowing causes the Treasury to borrow more from the Fed, which in turn either has to borrow money from abroad or creates it out of thin air.

11. Interest Rates

? The Rate is already at zero.  There’s no place left to go.  IOW, the Fed is out of ammunition to fight this economic crisis.

Things not talked about that we can speculate on:

• Food and basic items.

• Basic services.

• Availability of shelf items (things you find in stores).

• Availability of prep items.

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