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Recession 06 - The Storm Clouds Gather
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By William Cate
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Recession 06 - The Storm Clouds Gather By William Cate
Our economy operates on popular perception, not reality. If youregularly tell enough people that the king is wearing clothes,almost everyone sees the king clothed. Since January 2005, thePress has been increasingly focusing on the bad U.S. economicnews and the popular perception and thus the business reality isa slow downturn in the U.S. Economy.
The Conference Board Consumer Confidence Index fell twentypoints in September. The Consumer Expectations Index fell 21points in the same month. When consumers see bad times aheadthey don't buy durable goods and this creates unemployment. Thecycle of bad news is more bad news. This self-fulfilling trendleads to a Recession.
The three-dollar a gallon gas price is the driving force behindthe 9% 2005 inflation rate. It will drive up the costs ofeverything that is moved to market by our transportation system.Until wages offset higher prices, consumers can't buy as muchwith their money. Less buying means fewer jobs. Fewer jobs andless buying are the path to Recession. It's a self-feedingdownward spiral.
Consumers In Default
The American Bankers Association reported that the percentage ofconsumers in default on their credit cards during the secondquarter of 2005 had risen to 4.81%. This is the highest rate ofdefault, since they started collecting this information in 1973.Economists suspect that the defaulting consumers problem in aninability to pay their credit card debt and buy gas at the sametime. If this is true, the percentage of consumers unable to payanything on their credit cards will rise in the third and fourthquarters. For those debtors who realize that trying to live offtheir plastic isn't a viable economic strategy, they will buyless. This is the path to a Recession.
The Bursting Real Estate Bubble
The one bright spot in the economy for the middle class has beenthe appreciation in home values in recent years. In 2004, theaverage value of a single-family residence rose by 15%. Startingin January 2005, the mantra of the press has been the sky isfalling in the real estate industry. The hundreds of "realestate bubble is bursting" articles have changed the popularperception and the bubble is starting to burst. In the SanFrancisco area, where I live, homebuyers are few and inventoryis growing at rates nearly equal to those of the last Recessionin local real estate. Fewer properties sell and the sale priceis usually slightly below the asking price. During the lastlocal real estate recession of nearly two decades ago, theRecession started along the same lines. From the point thathomes sold below the asking price, the value of single-familyhomes fell 17% in the following year and then an additional 8%over the next three years. Homeowners lost 25% of the value oftheir homes. Homeowners, whose net worth drops by 25%, aren'tconsumers.
The Real Estate Recession is likely to be much worse this time.To fuel the buying bubble, lenders used creative financingtechniques. Borrowers had to assume that the real estate marketwould continue upward to justify doing the loan. With the realestate market turned downward, they will have to come up withtens of thousands of dollars to remain homeowners. Few will beable to do so. The lenders will foreclose. The added inventorywill depress the market further and the bottom of the Recessioncould see home prices fall at more than 30%. As for the formerhomeowners, they won't have the money to be consumers and manywill have to file bankruptcy.
Katrina Adds Worse News
There's the badly botched Government Katrina disaster reliefeffort. The Government's recovery solution will only compoundthe underlying environmental issues that created the disaster.Keep in mind that all of those Gulf Coast displaced persons arewithout jobs and in many cases, their employers no longer exist.Most people are debt ridden and many Gulf Coast residents willbe forced into bankruptcy. The filings will start in 2006. Fewpeople affected by this Hurricane season will be consumers inthe foreseeable future.
The Government's 9/11 response was emotional. It wasn't logical.Post 9/11 Government policies put increased pressure on ourbusiness and financial infrastructure. Compliance requirementsare moving many employers toward bankruptcy. For example, 66% ofAmerica's Flag Airlines are in Chapter 11. A failure businessstructure adds to the pressure for a Recession.
The Government Mess
It was logical to displace the Taliban in Afghanistan. It wasillogical to invade Iraq. Unlike WWII, where defense spendingmeant massive employment in shipyards and assembly plants,modern war requires far fewer workers and those needed areusually highly skilled. The military spending is contributing tothe economy's Recession bias.
I strongly favor free trade. However, it must create as manyjobs in America as it does in China or India. The Government'sfailure to ensure employment balance is a major contributortoward a growing U.S. tendency toward Recessions and Depressions.
The New Bankruptcy Law
In October, we'll have a new Federal Bankruptcy Law. It protectslenders. It hurts the public who will be forced into filingbankruptcy during hard times. In fact, it could put some middleclass Americans permanently into poverty. The Democrats havewisely distanced themselves from this Law. The Republicans willtake the brunt of what is certain to be growing voter hostilityas the Bankruptcy Court destroys them or their relatives. Thiswill lead to political change and thus economic uncertainty.
The Crystal Ball
So what does my crystal ball see for next year? I see aRecession and regime change on the Death Star on the Potomac.Over the years, my crystal ball has been about 85% right. Theunresolved issue is the ability of the Government to changepublic perceptions away from Recession and toward the PromisedLand of employed and contented voters.
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