MAY 2008: FORUM; THE STATE WE'RE IN
Economy sinks under too many pillows
The U.S. economy entered year seven of the upturn at the end of
2007 amid slow growth in output and decelerating employment
gains. Economic performance emerged quickly as the major
campaign issue with the media focused on every squiggle in the
data and candidates hurling charges during interminable
primaries. The opening months of 2008 brought declines in
employment, weak retail sales and, most likely, the onset of
the second recession of the 21st century. We will not know that
for sure until somewhere between six and 18 months after the
start when the official arbiters make the call. The boredom of
a long expansion has given way to the excitement of slow growth
and a rare recession. This is a new notion to many because the
last serious recession in the U.S. was in the early 1980s.
Since 1982, the nation has experienced 16 months of recession:
July 1990 to March 1991, and March 2001 to November 2001.
BY JOHN
MITCHELL
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While engaged in a hard-fought game of the “Princess and
the Pea” with my 4-year-old granddaughter, Cali, I
realized it could be used to illustrate the cycle. The game is
based on the children’s story and involves layering
mattresses and pillows atop a bed frame with a wooden pea in it
until the pillows are all used or the pile falls over. Playing
with an exuberant 4-year-old, the pile usually falls over.
The American economy has had an increasing number of pillows
piled on it that, even through the end of last year, did not
result in an output decline. But the pile kept increasing to
the point that the expansion has probably ended. We are in the
third year of declining residential construction activity with
permits down about 50% from their peak. The housing boom
— fueled by low rates, new types of mortgages, loose
underwriting and speculation — increased homeownership
levels and supported an army of builders, realtors, mortgage
brokers, appraisers and home-furnishing operations. Prices
soared until affordability limitations, defaults, tighter
credit standards, and excess supply began to weaken them. All
but one major metro area (Charlotte, N.C.) is now experiencing
price declines, according to the Case-Shiller Index.
Consumer and nonprofit balance sheet data for the fourth
quarter of 2007 showed a decline in net worth of $533 billion
from real estate as well as the stock market. The financial
implosion resulting from the loose underwriting standards,
leveraged positions and failure to comprehend risks has
tightened credit markets across the planet, affecting even
people and businesses without housing-related exposure. This
constitutes another drag that is challenging policymakers to
keep credit markets functioning and not contribute to moral
hazard (i.e.: making people responsible for their actions).
Another drag is caused by a run-up in food and energy prices.
Strong demand for energy in developing nations along with
supply constraints and the dollar decline helped push crude to
more than $100 per barrel. The U.S. imports most of its crude
oil and the price jump has created a decline in the standard of
living. Food prices have surged because of robust demand, poor
grain harvests and a headlong rush to biofuels. In the short
run, it’s a squeeze on family budgets and another pillow
on the pile.
Stimulus checks will start to arrive later this month, the Fed
has been creative in trying to keep markets functioning, and
there will be more intervention in the housing area. Markets
are adjusting, with February seeing an increase in home sales
and falling prices. Each cycle is different, and this period
will be remembered for housing performance. There will be a
regulatory response and a generation will forever think
differently about housing.
Oregon has fared differently in different cycles. Some can
remember the 1979-82 period when the eastbound lane of the
Oregon Trail was reopened and the state experienced an 11.7%
decline in employment and a drop in population. The next
downturn in 1990-91 was almost a non-event here with an
employment decline of 0.2% on annual average basis. The 2001
national recession was more serious in Oregon. The major
decline was in business investment, which heavily impacted the
state’s technology sector and resulted in three years of
falling employment. This time, with robust exports, prosperous
agriculture, strength in metals and aerospace, and fewer real
estate problems than many other areas, Oregon will hold up
better, but will not be immune.
John Mitchell is the former
chief economist for US Bancorp.
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