How Recovery Will Come to America and Oregon
On Wednesday, October 14th, I attended a presentation titled: “How Recovery Will Come to America and Oregon”by Dr. Bill C
onerly. The focus of his talk was on the cause of the recession and the economic forecast for the next 18 months or so. His presentation was well organized, down to earth and “plain language”. A few of the key points were:
- It is absurd to think that one person can change the jobs problem in a shor
t amount of time.
- Housing starts drive the GDP (Gross Domestic Product1). If this recession were truly a “housing problem” we would not have had a recession of this magnitude, nor would it have been global.
- Demand for new housing tapered because construction of new homes exceeding demand. At one point, the supply was 70 homes for every 100 people (people, not households); it should be at about 45.
- Factors affecting housing demand:
- Immigrant workers without jobs moving back to country of origin (migrate out)
- Divorced couples staying in the same house become of economic factors (rather than creating new households)
- Grown kids moving back to parent households
- There are too many vacant homes. There is no immediate solution. Vacancy rates will be slow to come down. The dip in “Owned” vacancy rate is attributable to first time home buyers moving from rentals to homes that they own. This is pushing the problem from one sector of the market to another.
- The public’s attitude drives the economy. Fear creates an environment where there is no spending on discretionary items, which leads to a down turn on retail sales (“retail sales fell off a cliff”.) The first component of the recovery is retail sales the second is money supply. In the short run, this is difficult, but it also provides the seeds for recovery. When people stop spending, they start saving.
- 10% unemployment actually equals 90% employment. The 90% that have jobs think that maybe they dodged the bullet; they have money in their pockets and create a pent-up demand environment.
- The recession is over. The recovery is a process. It is like having fallen 9 feet down in a 10 foot hole, you have to climb out.
- We are unlikely to see a big change in that (the non-spending) attitude — this recession has caused the “de-blingification” of America.
- Change will happen in gradual shifts.
- Challenges (factors that could limit economic growth) in the changing economy:
- The financial stress of a growing economy
- Credit limitations
- Credit card companies cutting back (which was needed, but could have an impact anyway)
- The risk is main street business, small businesses especially, are not necessarily looking good for line of credit extensions (typically subject to annual review). Bank examiners are afraid of looking bad, so are being very conservative. Not necessarily taking into consideration that a small business surviving the bad economy is a good thing – looking strictly at profits, which may be minimal for the last year or so.
- Vendors may not be able to deliver
- Lack of ability to stock shelves—the current economy has created an environment where existing inventories have been reduced
- May be unable to gear up to meet demand
- Human resources – challenged to find staff to deliver in a change market
- Big companies may wait and hold off on large purchases; will be in “wait and see” mode before making decisions on spending.
- Credit limitations
- It will be important to watch and track consumer trends to determine if they want to go upscale or take a more moderate approach.
- The biggest concern for the immediate future is to curb inflation. This is a very contentious issue; the forecast is the Fed needs to slow the economy at the right time. It is very likely that in March or April the Fed will hit the brakes hard. Long-term interest rates are likely to climb even sooner. If the Fed waits until later, it is likely that the inflationary period will be worse.
- In the past, there have been economic downturns where Oregon was distinctly Oregonian. This time it is a national recession. We have movement into the labor force affecting the unemployment rate, but it is actually, not that much worse if you look at jobs as a whole. Oregon tends to be a large work force in manufacturing and construction, both of which were hard hit. We have a high minimum wage, which affects job creation and retention, there are population shifts, where people are coming into the state, and start looking for work adding to the unemployment numbers.
- What every business leader needs to think about are what are the challenges going to be?
Consumers should prepare for tighter credit regulations, higher interest rates, and limited home price appreciation.
1Gross domestic product (GDP) price index. Measures the prices paid for goods and services produced by the U.S. economy and is derived from the prices of personal consumption expenditures (PCE), gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. It differs from the gross domestic purchases price index in that it ignores price changes in imports of goods and services and includes price changes in exports of goods and services.
Charts provided by Bill Conerly, data used in these charts were obtained from government and private agencies. Visit Bill Conerly’s Blog
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