Recession 06 - The Storm Clouds Gather
Recession 06 - The Storm Clouds Gather By William Cate
Our economy operates on popular perception, not reality. If you
regularly tell enough people that the king is wearing clothes,
almost everyone sees the king clothed. Since January 2005, the
Press has been increasingly focusing on the bad U.S. economic
news and the popular perception and thus the business reality is
a slow downturn in the U.S. Economy.
The Conference Board Consumer Confidence Index fell twenty
points in September. The Consumer Expectations Index fell 21
points in the same month. When consumers see bad times ahead
they don't buy durable goods and this creates unemployment. The
cycle of bad news is more bad news. This self-fulfilling trend
leads to a Recession.
The three-dollar a gallon gas price is the driving force behind
the 9% 2005 inflation rate. It will drive up the costs of
everything that is moved to market by our transportation system.
Until wages offset higher prices, consumers can't buy as much
with their money. Less buying means fewer jobs. Fewer jobs and
less buying are the path to Recession. It's a self-feeding
downward spiral.
Consumers In Default
The American Bankers Association reported that the percentage of
consumers in default on their credit cards during the second
quarter of 2005 had risen to 4.81%. This is the highest rate of
default, since they started collecting this information in 1973.
Economists suspect that the defaulting consumers problem in an
inability to pay their credit card debt and buy gas at the same
time. If this is true, the percentage of consumers unable to pay
anything on their credit cards will rise in the third and fourth
quarters. For those debtors who realize that trying to live off
their plastic isn't a viable economic strategy, they will buy
less. This is the path to a Recession.
The Bursting Real Estate Bubble
The one bright spot in the economy for the middle class has been
the appreciation in home values in recent years. In 2004, the
average value of a single-family residence rose by 15%. Starting
in January 2005, the mantra of the press has been the sky is
falling in the real estate industry. The hundreds of "real
estate bubble is bursting" articles have changed the popular
perception and the bubble is starting to burst. In the San
Francisco area, where I live, homebuyers are few and inventory
is growing at rates nearly equal to those of the last Recession
in local real estate. Fewer properties sell and the sale price
is usually slightly below the asking price. During the last
local real estate recession of nearly two decades ago, the
Recession started along the same lines. From the point that
homes sold below the asking price, the value of single-family
homes fell 17% in the following year and then an additional 8%
over the next three years. Homeowners lost 25% of the value of
their homes. Homeowners, whose net worth drops by 25%, aren't
consumers.
The Real Estate Recession is likely to be much worse this time.
To fuel the buying bubble, lenders used creative financing
techniques. Borrowers had to assume that the real estate market
would continue upward to justify doing the loan. With the real
estate market turned downward, they will have to come up with
tens of thousands of dollars to remain homeowners. Few will be
able to do so. The lenders will foreclose. The added inventory
will depress the market further and the bottom of the Recession
could see home prices fall at more than 30%. As for the former
homeowners, they won't have the money to be consumers and many
will have to file bankruptcy.
Katrina Adds Worse News
There's the badly botched Government Katrina disaster relief
effort. The Government's recovery solution will only compound
the underlying environmental issues that created the disaster.
Keep in mind that all of those Gulf Coast displaced persons are
without jobs and in many cases, their employers no longer exist.
Most people are debt ridden and many Gulf Coast residents will
be forced into bankruptcy. The filings will start in 2006. Few
people affected by this Hurricane season will be consumers in
the foreseeable future.
The Government's 9/11 response was emotional. It wasn't logical.
Post 9/11 Government policies put increased pressure on our
business and financial infrastructure. Compliance requirements
are moving many employers toward bankruptcy. For example, 66% of
America's Flag Airlines are in Chapter 11. A failure business
structure adds to the pressure for a Recession.
The Government Mess
It was logical to displace the Taliban in Afghanistan. It was
illogical to invade Iraq. Unlike WWII, where defense spending
meant massive employment in shipyards and assembly plants,
modern war requires far fewer workers and those needed are
usually highly skilled. The military spending is contributing to
the economy's Recession bias.
I strongly favor free trade. However, it must create as many
jobs in America as it does in China or India. The Government's
failure to ensure employment balance is a major contributor
toward a growing U.S. tendency toward Recessions and Depressions.
The New Bankruptcy Law
In October, we'll have a new Federal Bankruptcy Law. It protects
lenders. It hurts the public who will be forced into filing
bankruptcy during hard times. In fact, it could put some middle
class Americans permanently into poverty. The Democrats have
wisely distanced themselves from this Law. The Republicans will
take the brunt of what is certain to be growing voter hostility
as the Bankruptcy Court destroys them or their relatives. This
will lead to political change and thus economic uncertainty.
The Crystal Ball
So what does my crystal ball see for next year? I see a
Recession and regime change on the Death Star on the Potomac.
Over the years, my crystal ball has been about 85% right. The
unresolved issue is the ability of the Government to change
public perceptions away from Recession and toward the Promised
Land of employed and contented voters.