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Investor Resources Inc, Investment Advisory Service, Port Orchard, WA







2009Sep25 Is the Recession Ending?

2009Sep25 Is the Recession Ending?

This week’s poll results examine what respondents are thinking about the economy. The poll was not scientific and was driven by radio listeners of the syndicated Don Creech Radio Show and subscribers to its “Week in Review” email. Listen or subscribe at

Is the recession over?
Seventy percent of respondents believe the recession has ended. Officially it will require two quarters of positive GDP for the recession to be declared history. The government cannot post third quarter results until next month. Currently, we have been through four consecutive quarters of negative economic activity. The second quarter of this year was only a -1.0%, a big improvement from the prior quarter of -6.4%. Until we complete the first quarter of 2010, we will not know if this recession is ready for the history books.
Presumably, the wealth redistribution programs of Cash for Clunkers and First Time Home Buyer Tax Credit will have added sufficient activity to push the economy into a positive growth status. However, the unresolved issue is the sustainability of sales when the wealth redistribution programs have ended.
Auto dealers are holding the lowest on-lot inventory since 1992 according to CBS News. Artificially stimulated sales activity allowed dealers to increase their profit margin due to the increase in demand. In the short run, dealers can rejoice in their good fortune. In the long run, we tax payers have to thank principally China and Japan for loaning the money to make this happen. No one seems to know what or when the consequences will be when we tax payers have to pay back the money for the stimulus we received.
If the recession is over will your personal economy begin to improve?
Less than sixty percent of the respondents believe their personal economy will improve if the recession comes to an end. This is consistent with the common warnings that we will be facing a “jobless recovery,” which seems to be an oxymoron. If there are no new jobs, where is the recovery?
Increasingly, families are adapting to a “new normal” which is lower income forcing lower expectations for consumption on all family members. This is not the foundation for noticeable recovery or a return to normal economic growth after a recession. It is an omen of marginal activity resulting in more discounting and stores, if not whole businesses, closing. Shoppers will face increasing inconvenience as some local stores close but find more slack in their household budgets as prices fall to attract new shoppers.
Has the residential real estate market bottomed out and headed towards recovery?
Almost sixty five percent of respondents believe that the residential real estate market has found the bottom of price declines and should be headed towards better days for sellers or those hoping to use real estate equity to supplement retirement. For this to happen, inventories need to continue falling which will be difficult for several years. Lenders have a very large “shadow inventory” of homes in foreclosure, in default or likely to be in default that is expected to add seven million homes to available inventory in the next few years. That is more than a 500% increase over 2005 foreclosures. Expect a lower bottom in real estate prices.
August new home completions at an annualized rate of 760,000 were lower than in July by 5.5% and 25% lower than the prior year. These are projects that likely had permitting and financing commitments prior to the 2008 credit market melt-down. Banks continue repossessing properties that will come to market over time replenishing available supply. We doubt any sustainable up-trend in prices will occur in the near term.
Will the S&P 500 finish the year higher?
Greater skepticism exists among respondents about the future of the stock market than for real estate. Less than one quarter of respondents expect the stock market to finish higher this year. From the bottom of the market in March, we have witnessed a stellar recovery in prices which has been driven by a very thin number of participants. Institutions and hedge fund managers who are generally active traders have been the primary participants expecting future stock earnings to positively unfold in future months.
The latest retail sales posted by the Census Bureau show an increase for July. This was not enough to offset declines from the past year. However, this year’s media theme is “Hope for Change” and July provided something to cling to. Retailers and restaurants are facing daunting challenges as unemployment remains unabated. Until jobs restore household incomes, discretionary spending is going to remain weak benefiting businesses with strong management and cash flow management skills. Weak managers will experience classic Darwinian Theory in real time.

Will the number of full time jobs begin to increase?
Consistent with the positive outlook for the recession to end and for their personal economies to improve, slightly more than 50% of respondents believe more jobs will be available. This is inconsistent with consensus expectations of very slow job growth.
This recession has increased the skepticism of employers to unusually high levels reducing their inclination to hire staffin anticipation of more prosperous times. It is not uncommon to have a positive economic quarter pop up in the midst of a protracted recession. A recent survey of financial professionals was heavily weighted toward a “W” recession. Assuming the current quarter has a positive GDP out come; it is being discounted as an aberration because of the government intervention with short-term wealth redistribution programs. We have to wait and see, but we doubt consumers have decided to open their thinner wallets at this time.
A new forecast is for a reverse square root economy. We have experienced the sharp slide down and the market is portraying a sharp upward advance. Then the long slow slogging to get back to normal begins. This will feel a lot like treading water when you want to get back to shore but don’t know in which direction to swim.

Is the banking crisis over?
More than three quarters of respondents do not believe the banking crisis is over. Hotel occupancies have been so low that an increasing number, while still making some mortgage payment, are unable to pay staff, an essential element of successful operations. As we have reported several times in our radio program over the past six months, hotel foreclosures of significant size will likely show up by early next year.
The other two threats to the banking system remain in the realm of real property. First are commercial and office buildings with increasing vacancy rates and the need to refinance balloon payments. With decreased valuations, regional banks that are the dominant lenders in this arena will be reluctant to renew loans where the original equity has disappeared into thin air.
Second, especially in the San Francisco Bay area, many high end homes have lost sufficient value that even credit worthy homeowners who are current on their mortgage are considering voluntarily surrendering their homes to the lenders. They often have Home Equity Lines of Credit that they fully draw upon to have as much cash on hand as possible before dealing with the legal expenses of foreclosure and possible bankruptcy. Bankers are uncertain of the size of this problem but have publicly expressed their concerns. A few more years are needed for resolution. Without job growth, perhaps even a few more after that.

Is the credit crisis over?
Almost ninety percent of respondents do not think the credit crisis is over. We certainly have not had any reports of easier access to borrowed funds. Just the opposite remains the common theme on the street.
Banks are improving their own balance sheets by using TARP funds to purchase government securities. That improves their financial rating with the banking regulators. This is good for the owners and staff of the banks. It is not good for the economy since small businesses remain largely locked out of their traditional lines of credit. The impact is little to no new job growth.
Will consumer credit become easier to obtain?
Again, consistent with the optimism seen in earlier responses, more than eighty two percent expect access to consumer credit to improve. This year’s credit card legislation is likely to tighten credit scoring for access to credit cards. However, issuers are still in the business to make money. Due to restrictions on late fees and penalties, they will possible issue fewer cards to financially unstable users. In the end, that is likely to result in lower consumer spending but more financial stability for families as they adapt in one more way to the “new normal.”