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Molders Economic Index: Sliding deeper into recession yet still holding on

So far in 2009, the economy has been like the seasons. Winter has been cold and hard, but spring is a time full of promise for growth. Perceptions rather than economic realities drive some economic factors such as consumer confidence, spending, and saving. Even though today’s numbers look bleak, we are seeing seeds of hope being planted that can alter perceptions, change reality, and lead us to recovery.

Lisa M. Pellegrino

February 19, 2009

8 Min Read
Molders Economic Index: Sliding deeper into recession yet still holding on

So far in 2009, the economy has been like the seasons. Winter has been cold and hard, but spring is a time full of promise for growth. Perceptions rather than economic realities drive some economic factors such as consumer confidence, spending, and saving. Even though today’s numbers look bleak, we are seeing seeds of hope being planted that can alter perceptions, change reality, and lead us to recovery.

We are continuing to see plants close or merge with former competitors, both in smaller, family-owned businesses and firms worth hundreds of millions. It’s been less than two years since Basell bought Lyondell, but already the company is trying to reorganize under Chapter 11 bankruptcy protection.



Others plants are cutting back on operations, personnel, or both. Even those that still have a relatively stable client base are postponing investment and accumulating cash. The numbers are bad, but the future does look better. Similar changes are taking place in millions of households around the globe. These grass-roots changes will make things worse in the short run, but provide a solid foundation for long-term growth.

Falling consumer confidence is being mitigated by hopes that the Federal economic stimulus plan will jump-start the economy. We are also seeing indications that old-fashioned common sense about spending and saving is making a comeback. For example, total consumer debt has reached $2.2 billion, excluding mortgages. According to the Federal Reserve, U.S. household debt has increased each year since it first started tracking in 1952. The average household has 14 credit cards and 20% of those cards have reached their credit limits.

The credit collapse this past fall scared the heck out of people. Many feared losing their jobs while saddled with so much debt; and the result was that Q3 2008 was the first time in more than 50 years that U.S. consumer debt declined, as people began cutting back on spending and paying down what they owed.

We have also seen personal savings increase to about 2.6% in the tail end of 2008. Average personal savings had been hovering at 1% over the past several years. Most economists consider personal savings of 6-8.5% to be optimal to cover general needs such as cars, appliances, home repairs, etc. It does not include long-term goals such as retirement, college, or vacation homes. Again, this increase in savings is being driven by the mentality of preparing for a rainy day rather than the possibility of earning solid returns on savings accounts.

While in the short term the cutback in retail spending is killing some businesses and creating negative ripple effects in local economies, it is the foundation for a solid recovery. For some time, consumers have needed to learn how to balance long-term goals with short-term satisfaction. Paying down debt and gradually increasing savings rates indicates that consumers are preparing for a steady recovery. It puts more consumers in a numerical and psychological position to benefit from the new economic stimulus package. It’s a future less likely to bring skyrocketing growth, but also less likely to suffer sharp declines.

Key economic indicators

With that said, let’s look at some of the economic indicators we monitor. The U.S. GDP for Q4 2008 was down 3.8% at an annual rate. This was the worst we’ve seen since 1982, but it’s far better than most economists expected. We were bracing for a drop of at least 5%. Overall, GDP for 2008 actually grew a modest 1.3%. Repton projects the GDP will slide another 3% in Q1 2009 and perhaps as much as 2% in Q2, but will make gains of around 1.8% in Q3 with a stronger rebound of as much as 3.1% in Q4.

In January 2009, the S&P500 index lost 8.6%, the worst January in its history. But the U.S. trade deficit has hit a six-year low. According to figures from the Commerce Dept., U.S. imports fell to $174 billion in December, while exports fell to $134 billion. The $39.9 billion gap is a 4% drop from the $41.6 billion deficit in November. Overall, in 2008 the deficit fell 3.3% to $677 billion.

Jobs and manufacturing

The jobless rate climbed to a 16-year high of 7.6% in January. This includes both persons receiving unemployment compensation and those who are not but are actively seeking work. During the week ending Jan. 31, 4.81 million workers were receiving unemployment compensation. This brings the cumulative total over the past 13 months to 3.7 million jobs that have disappeared.

Overall, U.S. manufacturing jobs are down, despite the rallying cry to buy locally-made products. The Commerce Dept. reports that orders to American factories fell for the fifth straight month. Bookings declined 3.9% after a revised 6.5% drop in November. Businesses have been cutting back on production to prevent a stockpiling of merchandise. For all of 2008, orders for factory goods rose a meager 0.4%, the smallest gain since orders last dropped in 2002.

The Institute for Supply Management’s manufacturing index rose from 32.9% in December 2008 to 35.6% in January. The Tempe, AZ-based firm had forecast the index to hold at about the same, but despite the pleasant surprise, any reading below 50% indicates more firms are contracting than growing. Norbert Ore, chair of the ISM factory survey committee, indicated that the drop in manufacturing may be bottoming out. The slight rise “simply says we’re finding ourselves somewhere near the bottom,” Ore said.

One bright spot is that Intel Corp. has announced that it will invest about $7 billion over the next two years in U.S. manufacturing, a move that will create about 7000 well-paying, skilled-labor jobs.

Housing

Interest rates on 30-year mortgages are still more than 5%, but approximately $50 billion of the Federal economic stimulus package has been earmarked to subsidize interest rates of homeowners facing foreclosure. It will go to those who would be able to meet their mortgage payments if they only had lower interest rates. This particular program in the package gives taxpayers a lot of bang for the buck – it has the potential to keep several million families in their homes and the money flowing in their communities. Having these families continue to pay real estate taxes will help financially strapped municipalities and school districts.

According to data collected by Seattle, WA-based Zillow.com, the U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth. In 2008, the median estimated home price was $192,119, a decline of 11.6%. Major homebuilders Ryland Group, D.R. Horton, and Toll Brothers all continue to report losses and cutbacks.

There is a bright side, though. The National Assn. of Realtors reports that it is seeing an increase in qualified homebuyers with preapproved mortgages in all regions. The index of pending home sales in the pre-existing home market climbed 6.3% in December to 87.7, the first increase since August 2008. It was led by jumps of 13% in both the South and Midwest. The North and West still experienced declines, however.

Many realtors suspect that there are plenty of qualified homebuyers out there waiting for prices in their regions to hit rock bottom, which would give them more house for their investment. According to the U.S. Census Bureau, a record 19 million U.S. houses stood empty at the end of 2008. The vacancy rate (empty homes for sale) rose to 2.9% in the last quarter, the most in data that goes back to 1956. Given the time it will take to sell the glut of existing homes already available, we do not see the new home market rebounding until 2010.

Automotive

After December’s astonishing 36% drop in auto sales in the United States, it seemed like the only way was up. That was wishful thinking. U.S. car sales fell by 38% in January, proving that the new Presidential Task Force on Autos will continue to face challenges as it oversees the revamping of the U.S. automotive industry.

There’s a lot of doubt that the Auto Ownership Tax Assistance Amendment that passed as part of the U.S. economic recovery plan will be enough of an incentive to new car buyers. Under the amendment, car buyers will be able to deduct sales and excise taxes on the purchase price of a car up to $49,500. The original plan was to have interest payments deductible as well.

Ford burned through $5.5 billion in cash during Q4 2008 and is currently said to be tapping a revolving credit line. GM has plans to cut shifts in the second quarter at plants in Ohio and Michigan, eliminate about 2000 jobs, and reduce output at 13 other U.S. and Canadian factories. Chrysler LLC, Ford Motor Co., and Toyota Motor Corp. are also scaling back North American production.

Lisa M. Pellegrino ([email protected]) is a senior advisor of The Repton Group LLC (New York, NY) and Agostino von Hassell ([email protected]) is the president.  

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