People speak about “hitting bottom” as there will be a discernable and definite day when this managed depression will end. We’ll know that we are at that bottom because… er… someone will tell us? Folks talk about “leading economic indicators” (like the stock market that trades on expectations) and “trailing economic indicators” (like unemployment, which is only impacted after real demand returns to the marketplace) and “signs of a recovery.” We’re not facing the 50% GDP contraction of the Great Depression, but with over 6.1% of annualized GDP shrinkage over the last two quarters, we haven’t seen numbers this bad since that calamity.
First, that day of bottoming will not happen. Bottoming out is a process that impacts different regions, different neighborhoods, different people and different businesses at varying degrees and at different times. Seems obvious, but it really isn’t. If the credit markets unfreeze at the highest levels for major companies, that most certainly doesn’t mean the credit markets have also unfrozen for small or even medium-sized firms. And if the stock market rises and makes the bigger companies more valuable as a result, that doesn’t produce the same result for companies that are not publicly traded. The timing could be months or even a year or more between different levels of credit availability.
Second, the very notion that recovery starts when we “hit bottom” is also overly simplistic. If we view what has occurred as a “value reset,” whatever growth that will occur has to start from this reset valuation – we’re not jumping back to where we were before this crisis began. We’re just as likely to go “sideways” as up, and if you are looking at average growth, when it does begin, try and think 2-3% per year. But that doesn’t mean that all houses, commercial real estate or business values will grow at that rate when recovery begins (and again, it will begin at different times for different people and firms).
If you are in a hot new business sector or live in a neighborhood which is in a great market, near the action and in an amazing place, that uniqueness will accelerate values well beyond the average. Likewise, if the real estate is in an unsold distant tract neighborhood or the business was just getting by, those values could presumably drop even as the averages are growing. They recently bulldozed an entire housing community in southern California (in Victorville), because the developer went bust and the homes were never likely to sell. Seems a shame with all of those homeless folks around – even displaced middle class people who lost their jobs – to waste this value, but that’s precisely what happened.
Third, there is the question of employment – that nasty trailing economic indicator. As Fortune Magazine recently noted, we live in an era where consumers have elected to postpone buying just about anything that they can postpone buying. Just because inventories are falling doesn’t mean that there will be an immediate rehiring effort “to make more.” Much of what was carried as inventory was sold at fire sale prices to generate operating capital because of the lack of credit for most of American businesses. In short, they are using that money to buy time and stay alive until the markets in their sector really do stabilize. The Commerce Department posted a ½% retail sales gain for May, but it’s hard to read too much into sales that may be based on abnormally-deep discounting.
Even our “optimistic” economic policy-makers in Washington tell us that even if the GDP stabilizes and begins to grow, until that growth hits at least an annualized 2.5%, the unemployment numbers will continue to rise… well into 2010. That’s the opinion of Christina Romer, chairwoman of the White House Council of Economic Advisers, cited in the May 10th NY Times, but “Robert Reich, who served as labor secretary under President Bill Clinton and advised the Obama campaign, said on [May 10th] that the rate of growth would have to be higher — 4.5 percent — to rev erse rising unemployment.”
Additionally, there’s a harsh underbelly to these statistics, not just the fact that the unemployment numbers don’t include people who want full time work but only get part-time or occasional work or those who have just given up (multiply the raw unemployment number by 1.86 to see this “alternative measurement” – 9.4% x 1.86 = 17.48%), but that the quality of so many of the available jobs is so marginally remunerative and hardly reflective of a society with technological growth as an employment driver. And look at those states whose unemployment is well north of 10% - California’s basic rate is 11.5%, which creates a 21.4% alternative measurement. Wow! One in five Californians falls into that category, and the state is running out of government money just as the tax base is vaporizing.
As my friend and business consultant Dennis Duitch says in his May 10th Client Bulletin (www.duitchconsulting.com), citing the May 9th U.S. New and World Report: “a percentage of the American workforce, as older, college-educated workers ‘are less likely to retrain or re-educate for different careers once their occupations have become automated’ or their positions get eliminated by downsizing or company shutdown. Many who ‘devoted decades to white-collar, middle-skilled work’ have no other option in a job market which is ‘hollowing out’ – their only income replacements being ‘manual jobs that are hard to automate and not highly-skilled: sweeping floors, driving trucks, mowing lawns, cleaning houses, flipping burgers.’” What’s worse, there seem to be 4 applicants for every job opening in this market, and it is going to take serious time to remedy this catastrophic reality.
Meanwhile, we’re watching commodity prices inching upwards – particularly oil – as international demand, from places like China which is much less impacted by this managed depression than most of the rest of the world, seem to be moving up just as the dollar is beginning to show signs of weakness. The International Monetary Fund thinks the U.S. will recover earlier and faster than Europe, but then there’s Asia, a freight train of future growth. It’s no longer a question of “everything” coming back at the same time or even coming back at all. The trick for those in search of a future is to apply common sense to what is likely to be the upcoming value propositions, from companies to jobs, from neighborhoods to business sectors. Pick well, and you will flourish. Pick badly and look around at others who have made similar choices.
Remember there was a time when cities banned cars from the center of town because they scared horses. Then people welcomed cars as “cleaner” than horses – they hated the dead horses left where they fell in the street, the muck from horse manure and the stench of the inner city. Who around us is making buggies for horses? And which sectors are the real “next.” You cannot legislate a halt to change… it never works. The wave that will carry many of us to the next round of prosperity will leave many behind. This “readjustment” will touch each and every one of us.
I’m Peter Dekom, and I approve this message.
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