A Gallup poll taken last month showed that confidence in the economy has fallen to its lowest level since March 2009, which was near the low point of The Great Recession.
A growing and vocal minority of economists believe that there will be a double-dip recession primarily because of the intransigence of high unemployment and the rapidly faltering housing market. The notion of a “jobless recovery” has been around since the recessions of the 1950s and 1960s. It is a concept built on a relatively simple idea: Employment lags during a recession but it is always part of a recovery cycle. Production rises as businesses see the end of a downturn and anticipate improving sales. They are reluctant to hire new workers until the recovery is confirmed, but once it has been, hiring picks up.
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The 2008 – 2009 recession was – if it is indeed over – different from any other because of its depth and its causes. 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 businesses cut inventory and production. Joblessness rose. Finally, consumer confidence plunged.
The last downturn was so great that in some months more than 500,000 people lost jobs. The unemployment rolls are now more than 14 million and, perhaps more gravely, over 6 million people have been out of work for over 27 weeks – which means they may no longer be eligible to receive unemployment insurance benefits in early 2012. This segment of the population has already begun to add to the number of indigent Americans and will continue to do so unless they can find homes with friends and family.
The second dip of the recession, according to economists and the federal government, is likely to begin within the next two quarters.
Unemployment claims are running well above expectations, recently passing 400,000 almost every week. The four-week average of initial claims rose 3,750 to 414,750 this week. August unemployment figures showed the economy added no jobs last month. There is nearly no job creation in the private sector, and public sector employment continues to drop. Real estate prices are still falling, 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. President Obama recently proposed spending $447 billion on job creation, but the Republican drive for austerity may well keep the President’s proposal or any like it from becoming law. Similarly, 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.
This is what a double-dip recession will look like.
The cost of homes in the areas where prices have already dropped by 50% or more will continue to fall. These regions typically have the highest unemployment rates, local governments are hard pressed to offer basic services, and potential buyers are aware that home prices could drop further. Real estate values in these areas could drop another 20%. In the rest of the country, protracted unemployment and the unwillingness of banks to lend would make otherwise attractive all-time low mortgage rates unappealing.
Unemployment would move back above 10% quickly. In the 1982 recession, the jobless rate was over 10% for ten consecutive months and reached 10.8% for two months. During this period, the manufacturing base had not been destroyed. The economy is now arguably worse than it was in 1982. 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 a policy of keeping as much of their workforce 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 freeze by American businesses would contribute to keeping 200,000 to 300,000 people out of work per month. Unemployment remained flat from July 2011 to August 2011. At the peak of the recession that just ended, there were nearly six job seekers for every open job, according to the Labor Department. The job market could return to that point.
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 many people still had access to home equity loans taken out at the peak of the real estate market in 2005 and 2006. 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.” The situation has not improved in 2011. By the first quarter of the year, falling home prices had reduced the equity Americans had in their homes to nearly the lowest percentage since World War II, according to the Federal Reserve. Retail activity was helped somewhat by the capital available on these lines of credit in 2007, so store closings were probably deferred to the latter part of 2008, but then accelerated in 2010. With more than 11 million mortgages underwater, 24% of the national total, and several million more almost there, the consumer will have no cushion as the economy deteriorates over the next six months.
4. Consumer Confidence
Consumer confidence, the critical gauge of the activity that represents two-thirds of US GDP, will plummet again. The Conference Board’s Consumer Confidence Index would certainly move back toward the all-time low it hit in February 2009 when it reached 25. Currently, the measure is 44.5.
5. Auto Industry
Auto sales, one of the primary barometers of consumer economic activity and manufacturing output, would probably drop back to recession levels. People concerned about employment will defer car purchases. Annual car sales in the US were over 16 million in 2005 but dropped to just above 10 million in 2009. The car companies hope that domestic sales will rise to 13 million this year. In a double-dip recession, at least one million of those annual sales would be lost.
The nominal balance of trade would almost certainly drop, probably to a deficit of $25 billion a month, as the US takes in fewer imports due to low demand for consumer goods and business inventory. Exports would also drop because an economic crisis in the US would spread quickly worldwide. This is because of the tremendous size of the US GDP in relation to that of any other country. The drop in imports would be a signal that business activity had slowed in China, the rest of Asia, and Europe. Demand for consumer and business goods would drop in most regions, forcing a nearly universal cut in jobs outside the US. The most recent nominal balance of trade showed a deficit of $44.8 billion.
The budget deficit would grow beyond the $1.5 trillion expected this year. Treasury receipts fell to $2.1 trillion in the federal fiscal year 2009 and are down to $1.7 trillion so far in the 2010 period. If history is any guide, receipts in a second recession could drop by as much as $200 billion a year as tax receipts from both business and individuals falter. Aid for the unemployed could total $50 billion to annual federal government outlays. Unemployment insurance will cost Washington $44 billion this year. 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 has caused S&P to downgrade the country’s credit rating from AAA to AA+. The total outstanding public debt is currently $14.7 trillion – the highest it has ever been. This continues to cause concern among investors who purchase U.S. treasuries. The inability of the Treasury to rein in spending will cause borrowing to increase. This in turn could bring the government’s debt rating down even further, causing US borrowing costs to rise. Increasing costs will then raise the amount needed to run the government by increasing the amount needed to service debt.
9. Stock Market
If the performance of the equity markets in 2008 and early 2009 is any indication, the S&P 500 could drop from its current level of about 1,200 to a low of 676, which it hit in March 2009. 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. Many individuals 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.
The effect on most of the financial services industry would be catastrophic, particularly at the regional and community bank level where a number of home and commercial real estate loans are held. The FDIC would be forced to borrow money from the Treasury to cover bank closings. The number of failed banks could reach the level of the Savings & Loan crisis, during which over 700 banks and mortgage lenders were shuttered. There is already fear that defaults on EU debt could sink some of the large banks in Europe. Bank of America’s stock price and widespread branch closures are a sign of stress on the U.S. bank system.
11. Interest Rates
As the great majority of economists have pointed out, the Fed has already dropped interest rates to zero. This means the central bank is out of ammunition and QE3 won’t help.
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