Throughout modern history, with the exception of the Great Depression, the economy has proven resilient, bouncing back from downturns to often soar ahead in the years following. The 80s and 90s are prime examples, each decade beginning with recession but posting rapid growth and low unemployment subsequently.
This time, however, it’s different. Three years after the recession officially ended, unemployment, although improving slightly last month, remains way above average as sluggish economic growth continues. There are five problems without resolution keeping the status quo.
The housing market has yet to recover. Prices are still falling in some markets (e.g. Naples) and remain stagnant in most others. Almost $7 trillion in home equity has been wiped out and an estimated 25 percent of outstanding mortgages are underwater. There remains a huge inventory of homes for sale and foreclosure overhang that dampens new home construction by the industry. All the government attempts to support the market have just stalled the recovery process. Although mortgage rates have been driven to historic lows by the Fed, there is little appetite by banks to refinance homes without equity value. Moreover, tightened credit standards have reduced the viable home owner refinancing pool significantly.
Tighter credit standards are also being applied to small businesses as banks do not want to make already weak balance sheets even weaker. Large corporations, sitting on almost $2 trillion in retained earnings are not committing any of it to production increases and hiring, waiting to see what shakes out with the economy and avoiding taxes on repatriated overseas earnings where much of the money sits. Further, corporate pessimism stemming from the negative Obama administration attitudes toward business in general; the continued regulatory bombardment (despite announced postponement of some new EPA rules); and the assault on the domestic energy industry while subsidizing fanciful green energy projects all contribute to inertia.
The banking industry is in a precarious position as provisions in the Dodd-Frank are cutting profits drastically and balance sheets still have mortgage assets and related lawsuits to sort out. The industry is reducing workforce by the thousands. More ominous is the European debt situation in which Euro zone countries are coping with massive amounts of borrowings that cannot be repaid. Some governments have fallen (Greece, Italy) and there is bound to be some spillover to the U.S. as weak European economies fall into recession and cut back on U.S. exports. Some economists are now seeing a 50-50 chance of a U.S. recession next year.
Finally, 2012 will be momentous. It now has an historical Supreme Court decision in the works. President Obama’s affordable healthcare legislation will undergo constitutional challenge with a decision expected by June. Additionally, the presidential and congressional elections will determine the path of the economy for decades to come as the focus will be on taxes, spending and entitlements, all of which need drastic reforms.
With all these factors in play it’s not hard to see the economy continuing its slow walk.
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Write to Gerryk3001@yahoo.com.