The Great Recession: Just Beginning?

At the old site, I gathered some disturbing numbers to suggest that rumors of  “recovery” were greatly exaggerated.   For example, the number of cities with an unemployment rate of 10 percent or higher rose from ten to 144 between the fall of 2008 and the fall of 2009.  Government revenues and budgets, particularly in the most populous, industrial states like New Jersey, Illinois, and California had already begun to look extremely grim by then.  Consumer spending was still in decline, no matter what the confidence polls showed.

Now here I am to report on some numbers that suggest the use of the word “recovery” is more than the gossip of the vested interests—it’s a lie.  Consumer spending is still dropping (as of January, by about $120 billion, a 3 % decline since July 2008) in keeping with a precipitous decline in consumer confidence, and unemployment is up again.  My prediction in the fall of 2008 was that overall unemployment would exceed 10 percent by the end of 2009; my guess now is that it will reach 12 percent by the end of 2010, and will get worse by 2011.  These numbers are causally connected, of course, you don’t spend when you’re out of work, or, more pertinently, when you’re worried about keeping the job you have.

Consider commercial real estate.  I just read the Congressional Oversight Panel’s Report on this impending disaster, and it’s much worse than you think.  Between 2010 and 2014, $1.4 trillion in loans will come due—but nearly half of all these mortgages are already “underwater” (the borrower owes more than the property is worth) because commercial property values have fallen more than 40 % since 2007.  You read that right—more than 40 %, which exceeds even the unprecedented fall in residential property values.  Rents are down 40% for office space (where vacancy rates are at 18 %) and 33 % for retail space.

So the construction business is doomed to a lost decade.  I don’t see how it recovers before I’m dead.  The local and regional banks that serve this industry—they hold the paper that’s worth half of what they expected—will remain paralyzed as a result.  Welcome to Dubai.

But what about those improvements in the “housing market,” as the economists like to call the apparent cause and effect of our current predicament?  Prices are rising, aren’t they, at least in certain markets?  Well, no, they’ve just stopped falling.   Or have they?  The National Association of Realtors index of house prices in 20 metropolitan areas rose 0.3 % in December, then fell 3.4 % in January.

Existing home sales declined 16.2 % in December, and another 7.2 % in January.  New home sales dropped 9.5 % in November, 3.9 % in December, and 11.2 % in January—to the lowest level since 1963.  Inventory of new homes increased to 9.1 months in January, from 6.7 months in December.  Big surprise, mortgage applications are down again.

And these declines are occurring in the context of a tax credit for home buyers and mortgage rates that are ridiculously low.

The truly scary part of this sorry catalog is the plight of state budgets and their impending impact on employment.  California laid off 30,000 teachers last year because of a $9 billion cut to K-12 budgets imposed by the state legislature; it rehired some of these teachers on one-year contracts after the educational stimulus from Washington arrived, but the state’s school system now faces a $113 million shortfall.  San Francisco now plans to fire 10 % of its teachers and staff.  New Jersey’s deficit exceeds $45 billion, and so its school system—including my employer, the State University—will take a similarly catastrophic hit in the absence of a renewed stimulus plan targeted at education.  My brother tells me that in Illinois, where he teaches high school, the state has already announced that it can’t pay its “categoricals” such as Special Education mandates, so that younger teachers will be laid off; meanwhile, because the consumer price index has increased only slightly, wage increases for all teachers have been effectively nullified.

You may recall that the winter of despair—the depth of the Great Depression—came in 1932-33, not in 1929 or even 1931, when Herbert Hoover was still convening meetings of businessmen at the White House, hoping to talk them into maintaining their payrolls or enlarging their portfolios, and drafting the daring financial fix that would become the Reconstruction Finance Corporation (which, practically speaking, replaced the banking system over the next eight years).  The real descent came as the budgets of private charities as well as state and local governments were busted in 1931 and 1932, two or three years after the Crash.

So batten down the hatches, folks, it’s not going to get any better any time soon.  The so-called recovery is a big lie because it is impossible in the absence of significantly increased employment and consumer spending.

But perhaps there is a silver lining in this dark cloud coming down.  As late as October 1932, Roosevelt was accusing Hoover of fiscal profligacy, and saying “I regard reduction in federal spending as one of the most important issues of this campaign.  In my opinion, it is the most direct and effective contribution that Government can make to business.”   Four years later, having promoted real recovery by deficit spending, by supporting the Wagner Act and Social Security, and by using the Temporary National Economic Committee to discipline an unruly capitalist class, FDR won a realigning election that, among other things, brought black voters into the Democratic Party.  Maybe Obama can pull off a comparable miracle between now and the election of 2012.


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