Jan 8, 2010
Great Recession Effects Could Linger for Decades

We may be just beginning to emerge from a really big, but “normal,” recession.

It’s “normal” for the circumstances, but this recession is “abnormal” in that its effects are likely to linger for years and shape the new generation of consumers, much as did the Great Depression of the 1930s and in much the same way. It’s being called the Great Recession.

After a nerve-wracking 2009, growth appeared to be restarting in November but recovery will be slow, taking three to five years. And even when the economy is back to “full” strength, it will not be the American economy of 2000-2007. That is gone forever.

That’s the assessment of Edmond Seifried, who was professor of economics and business at Lafayette College in Easton, Pa., for more than 25 years and is currently executive director of the Sheshunoff Affiliation Programs, a consulting group for community bankers. He spoke to fruit growers and packers at Washington state’s Northwest Hort Expo Dec. 6, in a return engagement. He had wowed the same crowd a year earlier with his astute perceptions of what was happening as the recession was just being recognized.

“People have cut back on consumption and changed their lifestyle, and they like it,” he said of the events of 2009.

“Producers should prepare for the ‘Lite Economy.’ Reel back your expectations. U.S. consumption will drop and saving will rise. Consumers will spend less and save more.”

When the recession began in 2007, he said, American consumers were spending an average of $381.6 billion a month on retail products and food service. With normal growth, they would now be spending about $405 billion a month. Instead, spending has dropped to just under $350 billion a month. Consumers are not spending $55 billion a month, and that 14 percent decline has taken a toll on the economy. Consumption is the most important piece of the U.S. gross domestic product.

Why does Seifried call this recession “normal”? He proudly shows an article he wrote in 2005 in which he predicted housing was forming a bubble that would burst. And, in studying 20 previous housing bubbles dating back more than a century, in 19 cases recession followed the burst. It is the normal response to a housing bubble, he said.

While the recession was caused by the housing bubble, it was “triggered” by the high gas prices of 2007-08 that stripped people of discretionary income and revealed how vulnerable they had become, he said. They couldn’t pay the mortgage.

Defaulting mortgages stripped the value from mortgage-backed securities, which banks had sold as investments, many to retirement funds. This affected the stock market.

Loss of capital told banks not to lend, adding to the problem of reduced consumer income. The Federal Reserve’s cutting interest rates to encourage spending further decreased the incentive to lend and hurt incomes to retired people, and money flowed to the one safe investment – government bonds. The result was the government entered the economy in a big way, as the source of spending to stimulate the economy.

Seifried believes interest rates will start to rise early in 2010, making credit more available as banks want to lend. But if consumers are reluctant to spend, business will be equally reluctant to invest, and job recovery will not happen quickly. In this recession, he said, 6.9 million jobs were lost, the worst since 1939; some 15.5 million workers are officially unemployed and many more are underemployed or “discouraged” – no longer looking for work and no longer reported as part of the work force.

The unemployment rate may be as high as 20 percent, he said.

The Great Recession was psychologically so damaging, he said, so frightening, consumers are becoming like the Great Depression survivors: parsimonious, won’t spend, don’t like credit.

The “problem” with the seeming virtue of saving is, he said, the Fallacy of Composition. What is good when some do it is bad when everybody does it. Saving means not spending. Not spending cuts capital investment and eliminates jobs. No job means no money and no saving. It is a spiral down. Japan, he said, is still fighting to restore its economy after Japanese consumers shifted to the saving mode.

The recovery in Gross Domestic Product growth that began in November, while a hopeful sign, was bolstered in large measure by federal programs to encourage spending – direct spending by the government on infrastructure programs, giving money to states to save jobs for teachers and other public employees, giving incentives for home buyers and the “cash for clunkers” program.

The Gross Domestic Product, he reminded, is made up of C (consumer spending) + I (investment spending ¬in equipment and housing) + X–M ¬(exports minus imports) + G (government spending). In the most recent growth report, government provided the largest offset to declines in consumer spending and investment, augmented by a boost in exports.

“Like sugary Halloween candy that gives a quick energy boost but no long-term nutrition, the headline of GDP growth may prove to be sweet but short-lived,” Seifried wrote in an article on his Web site, www.smslc.com. “Much of the growth can be attributed to federal stimulus programs as well as the Federal Reserve’s policy to keep interest rates at bargain basement levels.

“An analysis of the composition of the GDP reveals growth that may be hard to sustain without federal fortifications.”

In giving advice to fruit growers, Seifried suggests they prepare for the “Lite Economy.”

Direct farm marketers may benefit as they become local attractions for “staycations,” as people stay closer to home.

People will continue to eat out, but they’ll eat at cheaper places.

Generic products trump brands. People are still feeding their pets, but they’re turning away from gourmet feasts to dry stuff in bags.

Marriages are being delayed as many feel they don’t need the added responsibility. The year 2008 had the lowest marriage rate ever, he said.

“Marriage is good ¬– for spending,” he said. “You suddenly get stupid.”

That was, he added, meant to be a bit of humor.

On the expense side, farm employers need not feel they need to give large raises, he said. The cost of living is not rising; it is in fact falling. We are seeing deflation, not inflation.

While consumer confidence during this recession fell to levels never before seen, he said, there’s a bit of oddness about it all.

“The United States is the richest country in the world, by far,” he said. “The average American produces $48,000 a year. We have a GDP of $14.5 trillion.”

By comparison, people in Europe ¬– the next-richest place ¬– produce $30,000-plus per person per year, he said. Americans produce in one month what the average Brazilian takes a year to produce. The American economy generates in one hour ¬– $12 billion – what Afghanistan produces in a year.

“We have a lot of room to drop before we lose our position,” Seifried said.

In one other point, he noted: “We should have seen this coming. Ben Bernanke (the Federal Reserve chairman) got it wrong. My profession failed you. Economists did not warn you this could happen.”

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