By Jim Carpenter
UNC- Charlotte economist Dr. John Connaughton recently addressed Chamber and Union Partnership for Progress leaders, telling them the recession is over but the recovery will be long and painful. Stable gas prices under $3.00 per gallon and loosening of bank lending restrictions are needed for recovery.
Connaughton says that President Obama’s $787 billion stimulus package has helped some but not enough. He points out that only $300 billion was actual stimulus, the remainder being social agenda. A significant amount of stimulus dollars remain unspent.
Connaughton attributes the steep rise in the cost of gasoline to over $4.00 per gallon in the summer of 2008 was the trigger that sent the US into what he coined “The Great Recession”. The sub-prime housing crisis and financial sector shut down followed in fall, 2008.
Connaughton pointed out that each fifty cent spike in the cost of gasoline takes $150 billion from the American economy, since most oil is foreign.
This scenario cost the US 8.4 billion jobs since 2008. Connaughton emphasized this recession impacted manufacturing and construction worse than the financial and housing sectors. Manufacturing and construction account for 15 percent of GDP but 50 percent of job losses during this recession.
These sectors witnessed 4 million in job loss- 2.2 million in manufacturing and 1.8 million in construction. Connaughton predicts that only 100,000 to 200,000 manufacturing jobs will return. Construction jobs counted for 5 ½ percent of GDP at the height of the housing bubble but the figure has adjusted to 3.5 percent. Typically construction accounts for up to 4 ½ percent of GDP. Hence, most construction jobs lost during this recession will not return either, leaving other economic sectors the task of creating over 7 million jobs.
After the fall of Lehman Brothers, banks became aware that the Federal Reserve could not be counted on as the “lender of last resort” to rescue them. Banks began creating reserve cushions to hedge against future losses. This move was to the detriment of small business and consumers who are not getting the credit needed to jump start the economy.
The banking industry is sitting on over $1 trillion in excess reserves. Connaughton estimates that lending those reserves could generate over $500 billion to GDP. Until a significant amount of that money hits the street and those with credit scores under 700 can borrow for cars, appliances and other consumer goods, the economy will stagnate.
A silver lining of recession is the fact that America’s trade deficit has fallen from $700 billion in 2008 to $380 billion, a level Connaughton says is not a drain on our economy. Americans are purchasing 25 percent fewer foreign made goods than before the recession.
The Consumer Confidence Index, referenced to base year 1985, fell to 81.8 percent in September, 2001 and was at 82.5 percent in October, 2005 (Katrina). Confidence reached an all time low of 25 percent last winter. The previous low was 54.6 percent in October 1992.
Confidence levels must recover to 75-80 percent as an indication that that consumers feel good enough about their employment to obligate for monthly payments or draw down savings to make major purchases (vehicles, computers, electronics, appliances). This is crucial since consumer purchases make up 70 percent of GDP.
The nation currently has an eight month existing supply of new homes. This needs to be reduced to five- six months for housing construction to begin to recover.
Connaughton refutes the rhetoric that no one knew the recession was coming. The Federal Reserve Board’s decision to reduce interest rates by one fourth percent in August, 2007 was an indicator that trouble was brewing.
The Great Depression was actually three depressions. First was the 1929 stock market crash. Banks were left holding worthless paper and stopped lending. The beginning of a recovery was dashed by a rash of bank failures in 1933. President Roosevelt declared a week long bank holiday to stop the run. The result was that the economy and the recovery slowed. In 1936, the Federal Reserve Board increased bank reserve requirements from ten to twenty percent to ward off inflation. Resultant tight credit policy extended the depression. That is exactly the predicament in the US today.
Connaughton sees signs of recovery that will be slow. He cited GDP growth of 3.3 percent in figures released at the end of April as an important good sign. Last month, 290,000 jobs were created. Unemployment figures should rise by summer as those who had given up looking for work re-enter the system as unemployed with heightened expectations.
Continued GDP growth and growing employment signal the recession’s end. But the banks must begin lending for the economy to grow.
Finally, Dr. Connaughton defined an economist as “one who tells you tomorrow why what he told you yesterday didn’t happen today”.
Jim Carpenter, CCE is president of the Union County Chamber of Commerce
