Some exuberantly optimistic economists are now saying that the recession is over and going so far as to predict more than 2% increase in home sales in 2010. Their predictions and public statements, they say, are justified by the rapid increase in the public markets, with the Dow now over 9900, reaching towards 10,000.
Yet some economists think the economy is far from recovered or that the recession is over. Many of these more pessimistic analysts look at underlying numbers and see patterns that cause distress.
Which ever is correct, the economic Depression is still ongoing and likely to continue for some time to come – the position the Institute has taken for some time now.
We define this Depression on the basis of confidence in the financial system and in government’s management of it, as well as the gravely reduced levels of consumer confidence.
So let’s look at some facts moving forward.
Some 98 banks have failed in 2009 according to the Federal Deposit Insurance Corp., a division of the Federal Government. Conservatively, more than 125 banks will fail in this calendar year, and some expect that number to exceed 150 by year’s end. Each Friday, the FDIC publishes its updated list of failed institutions, and October is expected to be rather severe (as many banks use September 30th as the end of their fiscal year).
The small to mid-cap banks that are failing most recently are doing so not on the basis of sub-prime or liar loans, but on commercial loans, many of them for construction and development over the past five years. This is no news.
Media reports of hotels closing their doors and owners turning them over to the lenders have been published for several months with regular frequency. The FDIC warned many of these lenders not to make many of the commercial loans they originated because of high risk. And now the FDIC is itself in the red, having lost $26.6 Billion in this calendar year alone in bank failures. It will doubtlessly require a massive injection of capital from Congress to continue its work over the next few years.
Commercial loan defaults nearly destroyed and certainly harmed CIT Group, a major lender in this market and source of capital for the hospitality industry (restaurants, hotels, caterers, etc.). Much of the problem stems from such lenders making loans on commercial developments without conducting proper due diligence into the marketability of the proposed property development. The result is thousands of strip malls, restaurants, motels and hotels that have little or no chance of true financial viability.
The larger commercial lenders often lend through smaller banks, and so many of these are being impacted. Many economists and bank regulators agree that there will be as many as 1,000 bank failures by the end of 2011, greatly surpassing the 700 failures in the 1980’s S&L crisis.
If one considers that the commercial lending problem can cause failures in both directions, one might see that the total number of projected bank failures by 2011 is conservative, and could easily double.
Small banks, using partial capital sources from larger commercial lenders make bad loans, pulling down the small bank itself as well as impacting the commercial lender. Enough bad lending by small banks and the larger lender fails, taking with it hundreds of other small banks, which in turn take down other large commercial lenders, which in turn take down more small banks… and so on.
The cost today of commercial loan defaults exceeds $870 Billion. We warned when this was $102 Billion that a crisis was coming. Evidently, our prediction was on target.
The confidence of the American public in fixing this crisis is at an all-time low. To date, Congress has not passed any serious regulatory reforms or new regulations. The House passed the Anti-Predatory Lending Act of 2009 but it’s stalled in the Senate. What Congress has passed is so inconsequential that today, nothing has changed.
The percentage of sub-prime loans has continued at a steady pace since 2007. Now, some residential mortgage lenders using FHA lending guidelines are advertising no-docs or reduced documentation loans again – an open portal to liar loans.
Only about 40% of those qualified to obtain loan modifications have applied – which says more than half of Americans don’t believe these modification programs work. Many who did apply have been turned down or delayed so long that their properties end up in default. Foreclosures are on the rise, not declining.
Unemployment is continuing to rise, with no sign of abatement. Some have said “we’re in a jobless recovery”, but in fact, there’s no such thing. The last two recoveries appeared to be jobless, but they represented a significant shift from employment to entrepreneurship. But those hardy entrepreneurs are defaulting too as their clients either fail to pay bills or cancel contracts. As small business owners, they’re not measured in unemployment statistics and many borrowed with SBA loans to start their businesses – with defaults on those loans rising rapidly.
Large companies are not hiring in vast numbers again and are unlikely to do so anytime soon. Those showing positive figures in their bottom line at the end of the fiscal year have for the most part, not seen any increases in sales or revenues – most taking losses in those areas – but they took advantage of the Recession to trim costs and cut spending, often eliminating jobs as well as projects.
Evidence of this is the continuing decline in consumer advertising spending, with Q3’09 figures showing an additional 26% decline. We’ve already seen many major magazines shutting down, with others expected to close soon – some of them household names for multiple generations. Our newspapers are also closing. But the ad dollars are not moving to the Internet. They’re simply not being spent in order to help companies keep their bottom line positive.
This could have a continuing adverse impact as less consumers spend sales and revenues will reduce further. Next year, after shutting plants, cutting production, eliminating jobs, reducing spending – that bottom line in many companies will be printed in red ink in many an annual report.
Americans who’ve lost jobs or had financial difficulty, whether by their own fault or not face long term problems attempting to recover. Those whose credit reports reflect any form of adverse entry will face tough times attempting to find work at comparable wages to the jobs they lost, forcing them to scale back on all their spending. Costs will rise for such people as medical, auto, life and other insurance, based on credit scoring, increases. Since those adverse entries, including bankruptcies last as long as a decade on credit reports, many will have a tough time recovering for the next seven to ten years.
So is the Recession over? We don’t believe it is and think things will likely get worse before they get better.
Consumer spending is projected to remain flat or decline in the next five years. Home sales have only recovered in homes valued under $250,000, with large homes or pricier properties still sitting on the market. In fact, the higher price for the home, the less likely a sale will be.
Healthcare reform, which is admittedly needed desperately in the U.S., will have devastating impact on employment and small business as it presently is written. If mandates now proposed to have every citizen compelled to have health insurance, privately supplied, and funded at 75% by small business employers goes through, those small businesses will fail, or, they’ll terminate their employees and offer them contract work, exempting the company from the mandate and from paying unemployment, and other social benefit costs.
The healthcare bill could have the same impact on the U.S. economy that Smoot-Hawley had in 1930, to reduce business, cause massive unemployment increases, loan defaults and bank collapses.
Recovery? End of Recession? Don’t bet on it.