A Deep Recession

I’m sure you don’t need me to tell you that these are scary economic times.  That’s painfully obvious unless you live under a rock.  People are pulling back, trying to conserve money in case they lose their jobs.  I’m doing it; I’m sure you are, too. 

People are losing their jobs — 542,000 new jobless claims were filed last week.  That’s scary in itself.  Coupled with a stock market in meltdown and executive after executive heading to Capitol Hill with a tin cup in hand, it makes for a truly scary time.

In some ways it’s not a bad thing.  Americans — including the government — have lived beyond their means for a long time.  The consumer financed the expansion with purchases of new cars, big-screen televisions, video games, and everything else under the sun.  To finance that, they ran up huge credit card debts and took obscene amounts of money out of the equity of their houses.  To be sure, the consumer was aided and abetted by everyone from retailers to credit card companies and mortgage brokers (and companies), but this expansion was built on debt — a house of cards in a stiff breeze if there ever was one.  So it will be good for people and governments to live within their means again. 

But there will be a lot of collateral damage, it will be painful, and it’s going to take awhile before we see a recovery.

According to the following article, the data show that we are headed for a deep recession.

Key Economic Indicators Suggest a Deep Recession

By Neil Irwin and David Cho
Washington Post Staff Writers
Thursday, November 20, 2008; 10:42 AM

Businesses cut prices at a record rate last month, builders started fewer new homes than anytime on record, and last week more people filed for new unemployment benefits than in any week since 1992, according to government data, as the outlook for the economy continues to dim.

The Labor Department announced this morning that new applications for jobless benefits rose to a seasonally adjusted 542,000 last week. It also revised the figure from the previous week down to 515,000.

That follows announcements yesterday that new-home starts in October were the lowest since at least 1959, when the government began keeping data. The consumer price index plummeted by the most since that series of monthly data was started in 1947, as the economy slowed so abruptly that companies had to slash prices to sell products.

And Federal Reserve leaders released projections indicating they expect the economy to worsen significantly in the coming year. The most pessimistic of 17 Fed officials expects joblessness to rise to 8 percent at the end of 2009, which would be the highest in a quarter-century.

“We’re in the deep portion of the economic trough,” said Richard Yamarone, chief economist of Argus Research, explaining yesterday’s market sell-off. “So you have to expect a certain degree of negative sentiment, you almost have to expect doom and gloom at this point.”

The White House announced this morning that in response to the worsening economy, President Bush would sign a bill extending unemployment benefits if passed by Congress.

“The recent financial and credit crisis has slowed the economy, and it’s having an impact on job creation,” White House spokeswoman Dana Perino in a statement e-mailed to reporters. “The President is always concerned when anybody loses their job and wants to ensure that anybody who wants to work can find employment.

“Because of the tight job market, the President believes it would be appropriate to further extend unemployment benefits, and he would sign the legislation now pending in Congress.”

Yesterday’s news helped drive the Dow Jones industrial average down another 5 percent. Overseas markets followed suit today, and the U.S. markets opened in negative territory.

The consumer price index, a broad measure of inflation facing U.S. households, fell 1 percent in October, driven by an 8.6 percent decline in the price of energy. But the falling prices were considerably broader than that; excluding food and energy, which are volatile, prices fell 0.1 percent, the first monthly decline in that “core” price index since 1982.

Clothing prices fell 1 percent, for example, and the price of used cars and trucks was off 2.4 percent. More broadly, economists said, businesses are losing any ability to set prices because demand for their goods has dried up.

“It’s not simply that they don’t have pricing power,” said Joel Naroff, president of Naroff Economic Advisors. “It’s that they can’t sell what they have. If you have any inventory, you have to make sure it moves, and that means cutting prices.”

The silver lining of the negative inflation numbers is that dropping prices make it easier for people — at least those who do not lose their jobs in the downturn — to afford the goods and services they buy.

Similarly, weak construction numbers — housing starts fell 4.5 percent and new building permits issued fell 12 percent in October, the Commerce Department said — also contain benefits for the economy in the longer run. The fewer new homes built, the sooner the economy can work through an oversupply of housing.

Just this summer, many Fed officials and other economists viewed spiking inflation as among their foremost concerns. That appears to have changed. Besides raising their expectations for unemployment, the 17 top Fed leaders (12 regional bank presidents and five serving governors) cut their predictions of inflation in 2009.

Minutes released yesterday of the late-October meeting of the Fed’s policymaking committee gave strong signals that the central bank could cut interest rates again at its December meeting, following two rate cuts in October. Rate cuts indicate greater concern about a slowing economy than about the risk of higher prices.

The policymaking committee “agreed that it would take whatever steps were necessary to support the recovery of the economy,” according to the minutes.

The dropping prices even raise the possibility of deflation, or a sustained fall in price levels that can create a dangerous self-reinforcing cycle, although economists generally think it unlikely the United States will enter such a cycle.

“There is a risk out there” of deflation, Federal Reserve vice chairman Donald Kohn said in a conference yesterday at the Cato Institute. “But it’s still small in my mind.”

There was no single reason for yesterday’s stock market decline, which accelerated in the final hour of the trading day. Turmoil in the commercial real estate market deepened as securities backed by loans on commercial properties such as office buildings fell in value. Shares of financial companies, especially Citigroup, and real estate investment trusts fell sharply.

But investors were also spooked by the Fed’s weak projections and a general sense of anxiety.

“It’s a tough environment, you’ve got layoffs, you’ve got bad news, people are worried about banks,” said Andrew Brooks, head equity trader at T. Rowe Price. “It’s a nervous, anxious market.”

Investors sold off corporate bonds with lower credit ratings, concerned that a rash of retailers, manufacturers and other companies will close their doors and default on their debt in the coming months.

Moody’s has been predicting a sharp rise in failures among firms that have lower-rated — or “junk” — credit ratings. In a report last week, it predicted a “deep and protracted” recession would force more than one in 10 of these companies to go under. The majority of U.S. firms have these credit ratings.

The nerves in the bond markets are making it prohibitively expensive for many companies to raise money. And without a healthy bond market, a swath of economic activity is eliminated. Firms stop borrowing to buy construction equipment to put up buildings, acquire land for expanding restaurant chains or raise money to get through a cash crunch.

Because corporate junk bonds are more risky to own, investors often demand a higher yield to buy them. Yesterday, these yields, which move in the opposite direction of bond prices, rose above 20 percent for the first time since 1990.

The squeeze on companies eventually will cause some of them to file for bankruptcy protection. On Monday, Moody’s reported that the number of companies in danger of running out of cash reached the highest level since 2002.