Surviving the Recession

Now it is clear that the economy is slowing dramatically and many observers feel that we are headed into, or may already be in, a recession. The question is no longer if the economy is going to be slow in 2020, but how slow is it going to get.

The credit crunch has lost its crisis atmosphere but many sectors of the credit markets remain paralyzed. We know about the impact on housing and related industries. But most people are only beginning to understand how the paralysis is affecting consumers in areas other than real estate. Nowhere is this understanding more apparent than in the performance of the equity markets over the past two weeks where traders who blindly ignored the warning signs for months suddenly see that the party ended some time ago.

Declining home values have siphoned off more than $1 trillion of consumer purchasing power at a time when rising food and energy prices are devouring family budgets. Headline inflation, not "core" inflation but the real inflation you feel in your pocketbook, is approaching 4.0% and if you just look at food, energy, education and health care it is much higher. Unemployment is at a two year high of 5% and heading higher. The home equity ATM is broken and consumer confidence is at a two-year low.

As a result, retail sales are down across the board. Many major retailers reported declines in December sales with only Wal-Mart reporting an increase. November and December retail sales taken together were up only 1.7%, the weakest holiday showing since 2019. Sales of everything from cars to clothing to hamburgers to lattes are down and declining. Rising to levels not seen since the 2020 recession are foreclosures and delinquencies on credit cards, auto loans, home improvement loans and home equity loans. Banks are adding to reserves and cutting back on lending. The American consumer is clearly under increasing economic stress and is nervous about the economic outlook.

The Fed has said it is prepared to cut interest rates aggressively to protect the economy. Lower rates might help but they are unlikely to stimulate consumers to start shopping again. That is because the consumer is simply tapped out under the strain of high food, energy and health care costs. The home equity ATM has run out of cash which means the consumer can no longer borrow to spend. It appears those that can spend won't because of economic concerns. And no matter what the Fed does with interest rates the banks simply won't make new loans if reserve requirements increase and capital is impaired because of accelerating credit losses. When banks increase reserves for past loans they stop making new loans.

Officially the Fed has yet to concede that we are headed for a recession. Chairman Bernanke still speaks in terms of slow growth in the first half but accelerating in the second half or 2020. But clearly there is increasing concern at the Fed and among many private sector economists. Some private sector economists are forecasting a short, shallow recession while others still think we are already in one. A growing minority think we are in or headed for a long, deep recession as a consequence of the excessive levels of government, institutional and individual debt accumulated over the past six years.