Tag Archives: Economy

Economics 101: Moving Forward; The End is In Sight

It’s not over yet, but the end is in sight.

Economists are predicting an end to the current recession and Scott Anderson, Wells Fargo economist, is part of that group of optimists. “Green shoots have been proliferating in the economy and financial markets since January,” said Scott. “It’s a starting point, and these green shoots will turn into small plants. The economy could be growing by the third quarter this year and we’ll see stronger growth in the fourth quarter. I think we’ll see an end to the recession in a few months.”

Breaking Records

A recession, according to the National Bureau of Economic Research (the organization in charge of declaring a recession), is a significant decline in economic activity spread across the economy, lasting more than a few months. It’s normally visible in real GDP (gross domestic product), real income, employment, industrial production and wholesale-retail sales.

“This recession is causing a lot of panic because many young people in the work force haven’t seen a recession. The last major one we had was 1982-83 and many Generation X team members were too young to understand what was going on,” Scott said.

Recessions tend to happen every six years on average, and they usually last less than one year. The current recession has lasted 18 months. “This is one for the record books in terms of loss and length,” said Scott.

The May issue of “Economic Indicators,” a bimonthly publication that Scott develops for Wells Fargo team members and customers, shares highlights of the “Great Recession” of 2008-09. However, these aren’t what you’d expect to see in a normal list of highlights; it’s a list of the record-breaking damage to the economy we’ve experienced.

“Corporate profits have declined, the decline in the stock market is the worst it’s been since the Great Depression and unemployment may hit 10% by the time this is all over,” Scott said. “But things are looking up. For example, consumer spending has stabilized due to lower gas prices and strong tax refunds. Gas prices have dropped about 50% since last summer, and that has helped pull down inflation,” he explained.

“There are a number of indicators that also show we’re a few months away from the end of this recession. We’ve already mentioned consumer spending, but the Federal Reserve’s monetary policy is at work and the credit/liquidity facilities are working their magic. That led to a spring thaw in the credit freeze, which allowed mortgage rates to drop to historic lows last month, which in turn refueled the refinancing boom, giving folks more room in their budget to spend,” he said.

Watch These Indicators

By definition, indicators are statistics used to measure current conditions as well as to forecast financial or economic trends. A leading indicator is one that changes before the economy does, and a lagging indicator follows a change in the economy.

“When I look into my crystal ball, I look at several different indicators that move well ahead of GDP and employment data,” Scott said.

Housing starts – that’s the number of residential building construction projects that have begun during any particular month. – increased by 1% in April, which is the biggest one-month jump in several years. “The housing market is tantalizingly close to hitting bottom. Housing starts dropped 80% from their peak, but buyers are starting to come back into the market to snap up foreclosed or bank-owned homes,” Scott said.

Another indicator to watch is the Conference Board Leading Economic Indicator Index, which is made up of 10 forward-looking economic variables. “One is Consumer Goods Orders, which measures order flow, and since consumer spending makes up more than 70% of our GDP, that’s a good one to watch,” he said. “The stock market is also a good leading indicator to watch. It bottomed in March 2009, but is up strongly. The stock market can give false hope sometimes, but when you combine it with other indicators, you can make a convincing case for economic recovery.”

Scott said there was also a nice turn in the Consumer Confidence Index, a survey by the Conference Board that measures how optimistic or pessimistic consumers are about the economy. If consumers are optimistic, they’ll tend to purchase more goods and this increase in spending can stimulate the economy. “Consumer Confidence hit 54.9 in May after bottoming out at 26.9 in March, so there’s been a nice increase,” he said. “In May, 5.5% of households were planning to buy a car, up from 4% in March; and 28.7% said they’d buy major appliances in the next six months in May, as opposed to 24.5% in March.”

Unemployment data tends to be a lagging indicator, which is why unemployment will continue to rise even after economists like Scott predict the end of this recession. But Scott says following Initial Jobless Claims is a timely way to track unemployment. “When people lose jobs, they file for unemployment and every week the Department of Labor surveys the number of applications for unemployment,” he explained. “It’s weekly information that leads the monthly employment data. Initial Jobless Claims have improved since they peaked at the end of March, showing that labor market weakness may be ebbing.”

The Bottom Line

“I think the worst of this recession is over, although this will be one of the worst recessions of our lifetime,” Scott said. “I like to remind people that this, too, shall end. The economy follows the business cycle and it won’t keep dropping forever. From this economic decline, we’ll plant the seeds for expansion.”


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News from the Greater Washington Economic Conference

By Wes Foster, CEO Long & Foster Companies

Dr. Steve Fuller, Economist at George Mason University says “The payroll job loss as likely to go deeper and longer – perhaps 18-20 months.  There are currently 13 million unemployed, and many of these people will stay unemployed because the new jobs will have different qualifications than those for the people getting laid off.  He predicted oil will still be below $80 per bbl in 2011.  Normally there are 5 million house sales per year (it got up to 7 million a few years ago), and we are currently around 4.5 million now.  Consumer spending will be a negative 1% in 2009 vs the normal 2.5% growth per year.

The Washington economy will have a 1.5% growth in GDP vs the negative nationally due the presence of the federal government.  Where Detroit has autos; LA, films; Houston, oil; a third of our economy is directly tied into the feds, and that component is rising.  Federal spending here will total some $135 billion in 2009.  Federal procurement dollars have tripled over the last 10 years with much of the corresponding job growth going to Northern VA. 

Job growth has averaged 46,500 per year since 1991 with some recent years as follows:

  • 2003 – 56,000
  • 2004 – 71,000
  • 2005 – 63,000
  • 2007 – 29,000
  • 2008 – With one more month’s numbers to come in, he thinks it will net out at 25,000

Washington is double the national job growth rate in professional and business services which have an annual salary of $75,000.  Due to the region’s wealth, our retail trade job growth is 3 times the national average, and other services (such as daycare, etc.) twice.

Steve sees the spread between our unemployment rate and the national rate (now 3%) perhaps growing to a 4% spread. He thinks our economy will begin to rebound the second half of 2009 with a total net new job growth of 230,300 for the region over the next 5 years as follows:

  • 2009 – 23,700
  • 2010 – 36,500
  • 2011 – 42,400
  • 2012 – 48,100
  • 2013 – 54,000

Of these new jobs, Northern VA will have 125,900 and Suburban MD, 66,000.

Needless to say, we are very fortunate to be living and working in this area for a number of reasons.  Let us hope we can take advantage of the opportunities that may be more evident and attainable here than in many other markets.

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