With 2009 now in the history books, most Americans feel as if they’ve lived through their own version of the popular TV show “Survivor.” It took every ounce of energy, a few new skills and good luck to have made it through the tumultuous economic year. As a result, our personal balance sheets are leaner and meaner than before, as we cut our debt and increased our savings.
But surviving doesn’t mean thriving. Unemployment is still around 10 percent, banks aren’t lending at a volume that makes anyone, except the bankers, happy and battered industries from automakers to builders are feeling the hangover of growth dropping off the charts. Will 2010 bring new vigor to our economy, or are we in for more of the same?
The Great Recession ends now. The conclusion of one of the longest-running recessions since the Depression will officially be eulogized in 2010. The National Bureau of Economic Research (NBER) Business Cycle Dating Committee has the privilege of declaring the start and the finish of each recession. Its declaration ending the Great Recession, which started in December of 2007, is expected early in 2010.
Before the corks popped on New Year’s Eve, there were already signs of optimism for the economy. The gross domestic product (GDP) rose at 2.8 percent in the third quarter of 2009 and growth is also expected for the fourth quarter, with those numbers to be released later in January. Factory activity in the U.S. mid-Atlantic region hit a 4 1⁄2-year high in December. The closely watched Philadelphia
Federal Reserve Bank Business Activity Index rose to 20.4 from 16.7 in November, handily beating market expectations. A reading above zero indicates growth in the region’s manufacturing sector. Separately, a gauge of future economic conditions is showing a nice trend line. The Conference Board said its Leading Economic Index increased 0.9 percent in November, after a 0.3 percent gain in October. It was the eighth straight monthly rise.
Size and Scope of Recovery The consensus is the U.S economy will see a modest 2.6 percent increase in growth in 2010. Most economists agree that at some point this year, the boost to growth resulting from fiscal stimulus and from businesses rebuilding their inventories will ease back. The question remains whether the recovery can become self-sustaining before the stimulus eases. This is where there is the most disparity among economists.
Economists at Bank of America Merrill Lynch (BAC) sing the praises of the consumer who, they say, has held up better than expected through high unemployment, massive debt loads, depressed asset values and tight credit. In a note to clients in December, the economists said, “American consumers have been battered, but they still answer the bell when there is a good deal to be had.” Jim O’Sullivan, chief economist at MF Global Inc. in New York, is bullish on the economy in 2010. “Companies will soon start to hire back laid-off workers, boosting spending and income.”
However, Goldman Sachs’ team of economists is painting a more pessimistic economic picture. Their concern is that the economy is in danger of running out of steam early in 2010. “We ... continue to think that the recovery will be sluggish and that hiring will, if anything, come closer to following the ‘jobless recovery’ templates of 1991-1992 and 2001-2003,” the Goldman Sachs team wrote in an email to clients in late December.
The Wealth Effect: Stock prices rebounded in 2009, as the market made its most impressive run in almost 70 years. The S&P 500 Index’s 64 percent jump since March of 2009 made Americans richer by restoring $5.4 trillion to the U.S., according to data compiled by Bloomberg News and the U.S. Commerce Department. The short-term gain of 2009 doesn’t tell the whole story for the decade. The turn of the millennium was one of the worst decades ever for the stock market. In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s. Since the end of 1999, stocks traded on the New York Stock Exchange (NYSE) have lost an average of 0.5 percent a year, thanks to the twin bear markets.
Interest Rates: In its December meeting, the Federal Reserve’s interest rate committee announced that the Fed funds rate would remain low for an extended period. With rates near zero since the crisis began more than a year ago, investors know that “extended period” will likely end in late 2010. Higher interest rates will be a good thing for savers, but it does make the cost of business and other borrowing more expensive.
The less-talked-about concern is what effect higher interest rates will have on the asset boom of 2009. Stocks, commodities and gold have all marched forward in locked step, while the dollar declined. That doesn’t usually happen. While the dollar should be helped by higher rates, some other assets may lose the fizzle they enjoyed last year.
Inflation: By managing interest rates, the Fed also tries to control inflation. It raises rates to curb inflation and lowers rates to kick-start the economy. Runaway inflation is one of the biggest economic threats to any nation. For the U.S. and its super-sized deficit, there is added cause for concern, especially as the economy actually gets back on its feet. As we move into 2010, inflation is quite low and not an immediate concern. But students of high inflation know the Fed will have to act quickly to raise interest rates once the recovery is on stable ground.
Fed Chairman Ben Bernanke, in testimony on Capitol Hill, has promised lawmakers that when the time is right, he’s prepared to withdraw the extraordinary stimulus money the Fed has injected into the financial system. Doing so would reduce the likelihood of igniting inflation or new asset bubbles. But not everyone trusts Bernanke’s instincts. After all, he and his colleagues at the Fed didn’t see the financial collapse coming. And while he has been lauded by some — named Time magazine’s “Person of the Year” — for doing an extraordinary job, others say there would have been no need for such extraordinary measures if the Fed had caught the problems on Wall Street first.
Credit: It is hard to talk about interest rates and not mention credit. Credit is what makes our economy — and most of the world economies — go round. Usually, in periods of low interest rates, we see an uptick in lending. More people want to borrow money when it’s cheaper. The demand is out there, but the supply of loans to individuals and businesses is still far below what it was before the crisis. Banks have been pressured by the Fed, the president and members of Congress to lend more. They say they’d love to, but most borrowers don’t meet the new heightened lending standards.
Has the pendulum swung back too far in the opposite direction? Before the crisis, practically anyone could get a loan, and often without full underwriting. Now, even the slightest issue can make a perfectly qualified borrower unacceptable. Look for standards to be tinkered with in 2010. The days of easy lending are gone but the banks and their regulators will have to work out a compromise position to get credit flowing in a more productive way in 2010.
The Silver Lining: According to the Federal Reserve’s Flow of Funds report for the third quarter of 2009, released in December, consumer debt dropped at a 2.6 percent annual pace, a fifth consecutive decline and the biggest since quarterly records began in 1952. It is clear evidence consumers have spent the past year actively cleaning up their own balance sheets.
Also on the HorizonJobs: Employment is a lagging indicator for the economy, meaning the economy rebounds before jobs pick up. So it is not surprising that the jobless rate still hovers near 10 percent. The political pressure to improve hiring will pick up as we enter this midterm election year. If progress isn’t made in the private sector, don’t be surprised to see members of Congress push for a second stimulus package. Their jobs are on the line so desperate measures could be employed.
Health Care: While the health care debate monopolized U.S. politics in 2009, the effects of health care reform will be sorted out in 2010. Who will the real winners and losers be? Whether reform will really help small business or be an added regulatory headache is yet to be seen. Beyond social benefits, many companies will be relieved to get some clarity after the dust settles. If you are in charge of profit and loss statements, ambiguity is the enemy. Planning for the unknown is harder than planning for something you don’t like.
Article from the Rapaport Magazine - January 2010. To subscribe click here.