Economic Pain Won't Be Spread Evenly in 2009
Pockets of strength will be offset by tough slogging in many U.S. industries.
By Jerome Idaszak, Associate Editor, The Kiplinger Letter
October 20, 2008
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Recession is likely to be with us into mid-2009, even though Uncle Sam's plan to restore order to thaw frozen credit markets and ease the financial crisis will start to work sooner. Calming a chaotic Wall Street may take months.
The economic pain will be spread unevenly, with some sectors reeling and others nearly unharmed. An especially tough slog is likely for industries that were struggling before the meltdown: Autos, housing, retail, financial services, just for starters. Painful as it will be, though, it won't come close to matching the Great Depression -- no 25% unemployment and years of negative growth.
Consumers' easy access to credit is over. With borrowing curbed, spending will be flat at best. First to go will be luxuries: Travel, spas and pricier restaurant meals. Entertainment and leisure -- golf, cable TV, movies. In fact, shoppers will buy less of nearly everything: clothing, automobiles, furniture and electronics. But also home services and fix-ups and impulse purchases of all sorts. And when it comes to holiday shopping this season, retailers are headed for a dismal year. What's worse, the lousy Christmas will be followed by even more-miserable sales in the new year.
One reason: Joblessness will continue to climb, hitting 7.5% in '09, as demand shrinks and firms contract, laying off workers. Managers won't start hiring again until the end of next year, at the earliest. Only then will consumer spending rebound -- starting a new "virtuous" cycle: Workers spend money, create demand for goods and services, and trigger more hiring.
And business spending will languish -- no increase in capital expenditures until 2010, when the credit crunch eases. That spells few equipment purchases and only essential repairs. With loans hard to get, look for companies to stockpile cash for emergencies. As a result, the technology sector will pay a price. Fewer orders from Wall Street, which faces its biggest restructuring in 70 years, will also be a hindrance.
Figure on another year of suffering for housing as well: more builders and lenders going broke. Fewer sales of appliances, carpeting, aluminum siding, landscaping, etc. Home prices will continue to slip and foreclosures to rise, despite rescue efforts. The new president and Congress may take another run at stimulating the economy, but the rapidly soaring federal budget deficit will make finding the money very difficult indeed.
Still, there'll be pockets of strength. The economy won't be all doom and gloom. Watch for profits from health care businesses, exporters plus sellers and producers of food. Ditto, for data providers, accountants and lawyers hired to man the massive federal rescue plan. Defense and aerospace companies should also weather the economic storm well.
And helping to blunt the recession's blow: Lower prices for crude oil, as well as for gasoline and other commodities. For consumers, the 50% drop in oil prices since July is better than a tax rebate. Plus food prices are more stable.
The bottom line: The coming year is likely to be difficult, and the dynamism and heft of the U.S. economy will be tested. But it won't be defeated.
Kiplinger Letter editors also contributed to this story.For weekly updates on topics to improve your business decisionmaking, click here.
Reader Comments (5)
Posted by: Bob at 10/20/2008 10:02:01 AM
You folks need to get out of the office and talk to unemployed workers in the real world. A large percentage of the workers being laid off now were making good wages with at least some benefits.(That's why they are being laid off.) When they do find new jobs in the coming year, most will be for about half their previous wage and likely with no benefits. Many major U.S. companies have already adopted two-tier wage scales which guarantee that no future worker will have nearly as high a standard of living as the previous worker had. In many cases the wages are so low that the new workers with families will also qualify for food stamps. Rather than being a boost, they will be a tax burden. I'm afraid that your statement "Only then will consumer spending rebound -- starting a new "virtuous" cycle:" is just a lot of wishful thinking. Those lower paid workers won't become big consumers and sure won't be buying any new houses. That wonderful "50% drop in oil prices since Jul"y will still mean much higher gas prices than a year ago when the increase from $2 to $3/gal.started to push working people into overwhelming debt. I'm sure OPEC won't allow oil to go that low again. You seem to forget that if Main Street doesn't recover, neither will Wall Street. Nomen is absolutely right when he says that our economy is based on cheap energy and only by heavily investing in U.S. alternative energy along with conservation can our economy be saved. Anything else will ultimately be futile.
Posted by: bruce at 10/20/2008 11:40:41 AM
Analysts like yourselves live in a world of economic models which are not the real world.With the printing of money and no fiscal backing such as gold,all you are doing is creating inflationary pressures that will last for decades.Americans are going to save more and spend much less because they have lost their faith in the government and the banking systems.Retired people have lost wealth that wont be made up,stocks will not rise like they did in the past and unemployment could rise to 8-9 %. Business are not going to hire to survive, they will cut back spending and energy prices will rise again, because of OPEC and demand which again will cut into consumer spending.Throw your models away.They did not predict this crises.It is all about psychology and people are scared,and rightfully so.
Posted by: Joe Honick at 10/21/2008 05:15:48 PM
Both Bob and Bruce are dead on correct in multiples. I just sat through a panel of experts discussing the "situation". They did so competently talking only of technical aspects of the 'bailout' and various instruments of finance. Not once did they mention the greatest victim of all in this mess: public confidence which has been shattered. It is no special statement about the uneven nature of who will get hurt over the next months and perhaps even years. What is fairly disgraceful is that if a gang of plain people approached Washington for financial help, it would be called socialism. When financial giants do it, it is called necessary. Why is that?
Posted by: Skip at 10/21/2008 05:16:02 PM
As a business owner of 23 years, in the real estate and real estate services industries, and as a subscriber to The Kiplinger Letter for 25 plus years, it has been my experience that you are accurate in your predictions and observations approximately 98% of the time. This tragedy has several guilty parties, many of them homeowners that bought homes they could not qualify for, and government "leaders" whose intentions were to increase homeowner percentages regardless of the costs. We call the loans "liar" loans and "ninja" loans (no income no job or assets" because that is what happened many times. I do not put all this blame for expanding the truth on the applicants for mortgages as the mortgage brokers were getting a healthy fee and were peddling papers that most applicants were not sophisticated enough to fully understand. Then there were the agents and appraisers, I am licensed as both, that made decisions that were self motivated. I've lost many clients in my career because I wouldn't "go along to get along" or I would not "give me what I want to make the deal work" but I'm still here because the vast majority of business people today are honest, hard working people with ethics. I sleep well each night. We as a country will recover from this one the same way we have recovered from many other problems associated with our insatiable need for more "things". Those of us that have been honest, diligent business people for our entire careers will wait until this group surrounding us have learned from their mistakes and get on board our train. The one that just keeps chugging along, despite all the hills and valleys we encounter. It is the only way to really "last" in the business world.
Posted by: Neil at 10/22/2008 09:13:30 AM
It's called a business cycle. This downturn will pass albeit with some pain but it will pass like all others. Many, meaning, government, business, and some individuals have lived beyond their means for the past several years. It's now time to pay the piper. The seeds of the next expansion are already being sown by individuals as yet unamed. Spend less, save more, and invest wisely. Before you know it we'll all be singing let the good times roll.