#161. Recession?

Posted on | The Agurban

For the past four years I’ve had the opportunity to visit rural communities in 44 of our 50 states, seeing what is making them click and what their issues are. I’ve been to very prosperous towns and to ones that are a bit down on their luck. But, for the most part, the majority seem to be doing fairly well and from what I see in our own business of industrial development, the economy is humming along fairly well. That is why it has surprised me to hear so much talk of recession and the need for a bailout package for our country. 

Last month I was at the Economic Forecast Conference in Chico, CA, a wonderful rural college community in the northern part of the state. Three PhD economists preceded me onto the stage, each showing the problems that the housing downturn has caused in CA, which is the state that probably saw their housing prices increase at the fastest rate over the past decade and are also adjusting downward just as rapidly. 

Nancy Sidhu, Senior Economist with the Los Angeles Economic Development Corporation showed that the number of existing home sales in CA peaked in 2005 at 645,000 but are estimated to be down to only 110,000 in 2008. She said, “The slide in housing has already cost us over 50,000 jobs in the state since January, 2007.” 

David Gallo, who teaches environmental and energy economics at Chico State showed an interesting graph of the increase in home prices in CA from 1976 to 2004. From 1976 to 1990 they increased by 450% but then fell slightly in the recession of 1990, not recovering their 1990 value fully for nine years. Within the following five years (2000-2004) they increased another 500% in value! Today prices are off 20 to 30% in some areas, which looks like a huge decrease but not if you look at it from 1976 or even 2000 prices.

The final economist, John Mitchell, is the former Chief Economist for U. S Bancorp. He pointed out that in the past 25 years we’ve only had 2 recessions, which have lasted for only eight months each on average.

Their data intrigued me, so I decided to do my own digging to find out how severe this housing- led recession could be. If you get your information from the candidates or the national media (remember the adage “bad news sells newspapers”?, well, it also must sell votes!), it would scare you to death. Here are some of the statistics that you see most often quoted:

  • New home sales are the lowest they’ve been since 1965.
  • New home sales have fallen over 50% since 2005.
  • Our supply of new homes is almost 10 months compared to only 4 months in 2005.
  • Foreclosures are at record levels
The situation in housing is obviously dire. Builders have gone bankrupt, homes are being foreclosed upon and ancillary businesses like mortgage brokers, landscapers and others are in turmoil. But will the pain in housing push us into a recession and how bad will it be? And do we need a stimulus to avert one?

In my research I was shocked to learn that housing only accounts for 4.5% of the total GDP so even if housing activity in the entire country falls by 50% its impact is only a couple of percentage points to the overall economy. Contrast that to exports, which account for 12% of the economy and have been growing by double digit numbers, helped by the falling dollar.

And, what of foreclosures? RealtyTrac reported at the end of January that 1.033% of households in the USA were being foreclosed upon; more than double what they were in 2006. Yet in looking at their numbers there are only six states that are over 1.75% (CA, CO, FL, MI, NV and OH), either high-flying housing states with housing bubbles or states in the upper Midwest that have been hurt by the switch in auto production to the south. Contrast that to 24 states where the foreclosure rate is below 0.5%. Vermont, as an example, has a total of 29 houses in the entire state that are under foreclosure! Obviously it is not a broad based phenomenon but localized to a select number of states.

And, what about a recession, the definition of which is defined as two consecutive quarters in which the GDP falls?

In the 25 years from 1967 to 1982 we were in recession about one-third of the time. It was a time of high unemployment and high inflation. Do you remember when Jimmy Carter used the phrase misery index (a combination of unemployment and inflation) in his race against President Ford? The number peaked at 21.9% in May, 1980 and was one of the main reasons that President Carter was only a one-term president.

But in the next 25 years from 1982 to 2007 we’ve only had two recessions, as inflation has been tamed (less than 3%) and unemployment has average 5.4%, resulting in a misery index of roughly 8% for the entire past quarter century. And, as economist John Mitchell reported, those two recessions averaged only 8 months each, so we spent less than 3% of our time in recession, or one tenth of the time in the previous quarter century.

And, recessions can be good. One of the problems with capitalism is that the combination of optimism and greed can cause people to make poor investment decisions. I witnessed it first hand in the 1970s with farmland purchases, in the 1990s with internet stocks and most recently with home/condo purchases. While there were many unfortunate people who either tried to buy more house than they could afford or to try to move up in life, there also were the condo speculators (20 to 22% of foreclosures in CA, CO, FL, MI, NV and OH) who were buying 40 and 50 condos under construction hoping to “flip” them before they were completed. After all their mantra was, “housing prices can only go up.” I vividly remember hearing the same thing about farmland and internet stocks.

But the word recession seems to conjure up horrible images. Our politicians don’t seem to like it and are proposing a $168 billion (as in $168,000,000,000.00) plan that will refund $600 into the hands of virtually every citizen, whether you pay taxes or not, as the proverbial helicopter flies over the USA dropping $100 bills. This plan should add about 0.5% to our $14 trillion GDP, but unlike most other components of GDP will be a one-time event that will make continuing to grow GDP in 2009 that much more difficult. It would have a much greater impact to affect permanent change by continuing to lower taxes which encourages more investment and growth in GDP.

The latest economic reports show that as of December, 2007 we weren’t in a recession. While GDP grew by an anemic 0.6% in the fourth quarter of 2007, well below our accustomed 2 to 4% rate of the past 25 years we are still well above any “recession” level. If housing is excluded, the economy grew by 1.8% in the fourth quarter of 2007. And, most leading indicators don’t show one on the horizon either. One of the main indicators, initial claims for unemployment is barely above 300,000 or 0.19% of the labor force. Looking back at the past four recessions this number was at 0.27 to 0.42% in the month prior to entering into a recession. 

My bottom line is this. We are not in a recession yet; if we fall into a recession it will be mild; and an occasional recession is not bad. Government would do well to make new business formation easier, especially for small and new businesses. A big step in that direction is to cut taxes and reduce regulations. 

That’s the view of a non-economist observer from touring rural America.