Common Cents

by Joel Naroff

"The task now is to determine when the economy will turn around.”
The questions about whether we are in a recession are now history. They have been replaced with concerns about how long the downturn will last and what it will take to get things going again. There are some policies in place that will help out later in the year but, until then, we are just going to have to ride out the storm.
The economic data remain ugly. Businesses reduced their payrolls for the third consecutive month in March and that normally happens only in a recession. Manufacturers are cutting back production, consumer confidence has collapsed and people have stopped buying motor vehicles and lots of other goods. The rising cost of food and energy is making things worse.
With all the negative news, it is hard to imagine that the economy will ever rebound. But it will and, to understand why, look at the major problems facing the economy. The most critical one is the tight credit markets. Very simply, financial institutions have gone from not seeing any risk to seeing only risk. They have become extremely conservative in their lending practices.
The Fed has recognized the credit crunch implications and has been adding liquidity like crazy. It is taking any and all steps to stabilize the situation, including aiding a bailout of one of the nation’s oldest financial firms. The Fed’s imaginative and aggressive actions seem to be working.
Meanwhile, the cause of the economic crisis — housing — seems to have bottomed. Yes, foreclosures are still rising and there are precious few areas where prices are not falling. But it does look as if the residential real estate cycle has already kicked in.
The housing numbers are so low they probably cannot fall much further. Single-family housing starts are down more than 60 percent from their peak. Home sales are off about one-third and are at levels not seen in more than a decade. Although prices likely will keep dropping for quite some time — this too, is working in the market’s favor. The lower prices should help sales.
A stable housing market is no small thing. The sector reduced growth in 2007 by one percentage point and that restraint will disappear if we have only flat housing activity this year. That is likely to be the case.
Getting households spending again is a different story. Nothing causes consumers to become cautious more than a weak labor market. But the nation’s unemployment rate of 5.1 percent is historically low and nowhere near the 8 percent to 11 percent peaks hit during the steep recessions in the 1980s and 1990s. It is unlikely households will get back to the malls in a big way until the payroll losses ease.
So, we are in for a bumpy ride for much of this year. As long as there is no major crisis in the credit markets, the Fed’s actions, some fiscal stimulus and the normal workings of the business cycle should turn things around.
Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank.