Rhetoric and Reality

What an incredible time to be witnessing! Is this the next Great Depression (the answer is “no” in case you were wondering)?

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Political history and extreme economic uncertainty are on everybody’s mind. Let’s start with the bottom line: 2009 will be a tough year for many industries and for many families. We have downgraded our forecast slightly since the last article. The problems are projected to last well into 2010 and we are hoping for a recovery in 2011.

The “financial weapons of mass destruction” that Warren Buffett warned about more than two years ago have exploded. The federal government has, to varying degrees of certainty, committed to an economy-wide bailout of more than $1.5 trillion and counting, a sum equal to more than 10 percent of our annual Gross Domestic Product (GDP). The immediate question is what effect, if any, will this massive intervention into the marketplace have? The intervention will not stop the recession that we have been forecasting for the U.S. and global economy. 2009 looks to be the more severe phase of this negative cycle. It is now looking like 2010 may not be as deep as previously forecasted. However, the radical changes in the financial/investment world and the inevitable scrutiny to come may dull the 2011 recovery from what we had previously thought.

Bailout

While the rhetoric has been alarming, our analysis is that the current actions of the federal government, while perhaps necessary for the greater good, are in essence still a bailout for Wall Street, the cost of which will ultimately be borne by Main Street. The U.S. government is going into a negative cash position never before seen. The bailouts may exacerbate some problems and forestall the inevitable negative consequences by virtue of us falling deeper and deeper into debt and becoming more beholden to foreign entities to sustain our economy. Inflationary pressures, higher interest rates, more government and/or increased taxes are the likely end result, with the U.S. consumer/taxpayer and businesses bearing the burden. Alas, the bailout only increases the likelihood of the moral hazards of history repeating itself. Without penalty or pain, what lessons will be learned?

The precedent that is being set is even more alarming, and the unintended consequences of these actions may roll on for years. The obvious fallout will be a politicized process governing mortgage rates and the mortgage industry. In the near term, we do not see a quick turnaround for the housing/mortgage crisis. The recent proposed Economic Stabilization Act is still in skeleton form, with details to be announced.

Capacity Utilization Rates through September are reflecting the softness in the manufacturing sector of the economy. The Fabricated Metals Production Utilization rate has been drifting lower and is currently at 77.9 percent, the lowest since December 2005. Manufacturing Capacity Utilization (excluding selected High Tech) is at the lowest level (74.3 percent) since May 2003. The Iron & Steel Products Utilization rate dropped precipitously in the last three months from 91.3 percent to 85.2 percent as a result of slowing global demand.

The Fed’s entrance into the commercial paper market may help keep larger firms from having to downsize as radically as they otherwise might have, but the intervention is not likely to keep capital goods orders up in the face of less global demand. Several New Orders segments are already in Phase C and will soon be in Phase D. Search and Navigation Equipment New Orders is a thin 0.1 percent ahead of this time last year. Information Technology New Orders and Electrical Equipment, Appliances & Components (NAICS 335) are also about to enter Phase D.

Alan Beaulieu, alan@ecotrends.org, is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments. Visit ecotrends.org and subscribe to monthly updates on EcoTrends.
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