Is the Recession Over?

Daryl MontgomeryAugust 2009

Copyright 2009, All Rights Reserved

“The Depression is Over”-Herbert Hoover, June 1930

U.S economic activity bottomed in March 1933

The negative effects of the Depression lasted many more years.

Where Have We Seen this Picture Before?

• Because of a massive real estate bubble in Japan in the 1980s, many major Japanese banks became insolvent.

• The government kept them running by subsidizing them and many businesses, which prevented the problem from being solved. Known as zombies.

• Central bank dropped rates to zero.• Government engaged in one stimulus program after

another to revive economy. GDP went up with stimulus. Once it was removed, GDP turned down.

• First there was an initial recession from 1991 to 1993.

Japan had Negative GDP in the following Quarters

1997 – Q2, Q3 (recession)

1998 – Q1, Q2 (recession)

1999 - Q1, Q3 (not technically a recession)

2001 – Q2, Q3, Q4 (recession)

2003 – Q1

2004 – Q2, Q4 (not technically a recession)

2008 – Q3, Q4 (recession)

2009 - Q1 (-14.2% decline)

Claims That U.S. Recession is Over

• 87% of U.S. economists think Q3 will be the end of the recession.

• Economists average prediction of Q3 GDP growth is 3%, some as high as 6%.

• For a long time Bernanke has said recession will end by the fall.

• There have been a number of media articles stating recession is over.

• There have been media articles claiming real estate has bottomed.

How is the Economy Doing?

• Home sales are supposedly improving.

• Manufacturing improving.

• Exports Improving.

• NOT improving:Consumer spending (72% of economy)Service sector (79% of economy)Bank lending (key to future growth)Employment and income

Real Estate Deconstructed

• Sales have supposedly gone up 3 months in a row and prices 2 months in a row (NAR).

• Employment and income deteriorating (down 4.7% yr over yr). Mortgages hard to get. So who’s buying?

• 32.2% of mortgages in the U.S. are for more than the value of the underlying property –this is where potential foreclosures come from.

• Estimates: only 4% of mortgages will be foreclosed.• Foreclosures up 7% last month, 32% last year, despite a

number of federal and state programs to prevent them and banks not foreclosing to keep them off their books.

Manufacturing

• ISM July report 48.9 (50 or above expansion)– 6 of 18 industries reported growth.

• ‘Cash for Clunkers’ program stimulating auto industry (probably the worst hit) in Q3.

• Auto employment increased 28,000 in July! Autos added 0.2% to Q2 GDP! (And pigs can fly)

• Increased exports help, even if internal demand remains weak (happened in Japan in Q2).

• Likely to turn positive in August or September.

Exports

• Exports hit bottom (so far) in April and have risen for 2 months.

• U.S. trade deficit increased to $27 billion in June from $26 billion in May because imports rose faster.

• Biggest U.S. trade deficit was July 2008 at $65 billion when oil peaked.

• Trade deficit very dependent on price of oil.

• Lower the trade deficit, the higher GDP.

Bank Lending Getting Worse

• Banks improved earnings were the result of accounting changes (caused much better trading results).

• Loan portfolios deteriorated and loan loss reserves had to be increased (core business).

• Bankrupt, nationalized, and derivatives poster child AIG had positive earnings.

• Fannie Mae still lost $14.8 billion in Q2. • 77 Banks have failed so far this year. 305

banks now on troubled list. 25 failed in 2008.

The GDP Numbers Can’t be Trusted

• Prior to July 31, 2009, the BLS had 2008 U.S. GDP up by $450 billion or around 3.0%.

• The U.S. was in a severe recession for all of 2008. A recession is when economic output declines. GDP measures economic output. How could GDP go up during a severe recession?

• Revisions now have 2008 GDP up 0.4% in 2008. It should be down probably 3% to 5%.

• Total official GDP of $14.15 trillion could really be as low as $10 trillion.

Debt Prevents Sustainable Economic Recovery

• U.S. household debt (mortgages, credit cards, auto loans, etc) is $14 trillion.

• Corporate debt is $9 trillion.

• Official U.S. National Debt is $11.4 trillion.

• Unfunded Medicare and Social Security liability is $42 trillion (indexed for inflation).

• As of Feb 2009, at least $11 trillion was allocated for Credit Crisis bailouts (very little of this included in National Debt).

Conclusion

• Just as in Japan in the 1990s, conditions for a sustainable economic recovery don’t exist in the U.S. today.

• Increased consumer spending is key to better U.S. GDP. Need debt level to be reduced and jobs and income increased (economists not predicting this soon).

• Any given quarter can have positive GDP if enough government stimulus takes place. This doesn’t mean the recession is over (but the media will say it is).

• When stimulus is withdrawn GDP will fall back down. • Continual stimulus will be paid for with more money

printing – and this will be inflationary.