What a Difference a Year Makes!
While the recession did not begin with the bankruptcy of Lehman Brothers a year ago last week, the fall of the investment giant certainly helped catapult the US economy further on its downward spiral. Many people consider the event as a pivotal watershed in sparking traumatic changes in the financial world, especially the banking and credit system.
In mid-September 2008, when shockwaves from the collapse of Lehman Bros. suddenly humbled the nation’s financial stability and fear of the future began to stifle many of our daily activities, America’s economy accelerated its freefall. Monetary authorities around the world were thrust into Herculean efforts to keep things afloat, and we found ourselves closer than we ever want to be to a financial meltdown. It is only in the past few months that we have seen a return to normalcy and even the potential for growth. As we enter the second year since the beginning of this harrowing experience, we can better pinpoint key triggers of the crisis as well as signals that the worst is over.
First of all, the Lehman Bros.-domino effect on the financial industry pushed the nation into a period of uncertainty and hand wringing. A great loss of confidence in both business and government soon followed.
Retrenchment and an overwhelming concern for the future, fueled by almost daily notices of bankruptcies and foreclosures, pushed the economic pendulum toward a near panic mode. Massive numbers of pink slips were issued across the nation as companies began to experience difficulty in paying for supplies or making payrolls.
In spite of historic actions taken by the Federal Reserve to stabilize and create greater availability of funds, the banking industry contracted and a lending drought parched the business world, drying up of the flow of capital available for credit. Without sufficient financing, numerous operational expansions were delayed and the building of new roads and schools was stalled in various states.
The federal government reached into its pocketbook to rescue failing programs and offered protection from pending bankruptcies through bailouts and other means. New directions regarding executive bonuses were suggested and, in some cases, demanded. A stimulus package was authorized and various incentives were adopted to encourage consumers to take their money from their mattresses and spend it.
The pilgrimage back to the future has been slow and tedious and replete with myriad surprises. We have watched the pendulum move from a loss of confidence in the nation’s financial system (even though boosted by unprecedented billions of government dollars) to today (when several major financial companies are reporting record profits). There is strong evidence that the recession is technically over though it may not feel that way to many Americans for a while. Some industries continue to struggle, but the amount and degree is not seriously threatening the economy as before. The housing market, another factor in the economic demise, appears to have reached bottom in most areas and signs of life are emerging.
What the coming months will reveal is far from certain, but I am convinced that we are now on a positive and sustainable path. Thus, the legacy of the Lehman Bros. debacle might be that when times get rough, we should recognize that effective policy and general market resilience are powerful forces indeed. We are not completely out of this malaise by any means, but what a difference a year made.
posted @ 08:02 AM CST [link]
Friday, September 18, 2009
China Challenge
A recent President Obama pledge of an era of cooperation with China and resolving tensions through dialogue appear to be headed toward a confrontation that could seriously dampen those promises. Just last month, we took a look at the importance of this relationship in one of our newsletters. It’s amazing how quickly the tensions grew.
Protectionist actions and charges of unfair trade practices over the past week may now pose threats that could result in the deterioration of trade relationships and limit future business opportunities between the two countries. Such an outcome would be a big and costly mistake, both for the Chinese and American economies.
Last week, the President placed a 35% tariff on tire imports from China. This measure was taken following a complaint by the United Steelworkers that a recent surge of tire exports by China was leading to employment and productivity losses.
A few days later, Chinese authorities accused the US of unfair trade practices by dumping poultry and auto products. It was particularly noted in the claim that China has suffered for some time because of the bird flu and a flood of imports, particularly from the US where China gets approximately 80% of its chicken imports. Before all is said and done, the World Trade Organization will likely be refereeing the dispute.
Because of the ongoing worldwide economic challenges, there is some fear that these disagreements could possibly trigger retaliatory trade protectionism actions by both nations which, in turn, could substantially damage not only the US and China economies but also slow overall global economic recovery.
The dangers of protectionism are well documented, and the results have seldom proved helpful to any significant degree. Rather, such isolationistic obstacles have usually made trade worse, particularly in times of worldwide economic crises. The mathematical demonstration that more open markets promote overall prosperity was provided in 1809, but some lessons seem hard to learn. Even more compelling than the formulas is the experience in the real world.
In the 1930s, tariffs climbed to historical levels as nations around the world attempted to protect their domestic markets amidst a severe depression. The Smoot-Hartley Tariff Act of 1930, enacted to protect American businesses from lower-priced European goods, failed miserably and led to immense retaliation and counter-retaliation actions. The result was a severe contraction of international trade and a major employment drop in most industrialized countries. By 1933, unemployment in the US had risen to almost 25% and the labor force in many other nations faced similar situations. Limiting trade activity only exacerbated the situation.
Of course, the US is not the only nation that has recently attempted to protect its workers. A few years ago, similar approaches were considered by China, Britain, and members of the European Union, as well as several other nations.
Should a protectionist environment be allowed to bud and bloom among major trading partners, it could spark even greater difficulties in newly industrialized nations as they attempt to take their place on the world trade stage. It might also lead to a restructuring of some of the world’s major industries, particularly autos, banking, and telecommunications.
The recession which began some 21 months ago and affected the entire world has demonstrated the value of nations working together for mutual benefits. The relational connectedness of the US with its third largest trading partner, China, has sometimes been affable and at other times a bit strained.
Exports to China have increased exponentially over the past several years, largely outpacing US shipments of products and services to other regions of the world. Moreover, China’s exports of goods to the US, which totaled nearly $338 billion last year, represent more than one-sixth of that nation’s international shipments of manufactured products.
The commercial ties between the US and China have proven to be advantageous for both nations over the years, though trade between the countries and American investment in the Far East have slipped due to the global economic downturn. International trade can help both nations in their quests for economic recovery, and this is a particularly bad time to be curtailing cooperation.
The shrinking of the global neighborhood has created within nations the need to maintain harmonious relationships and work together to help each other. After all, a rising tide lifts all ships. Thus, it is highly important that solutions be sought to guarantee that the ships of state of the US and China remain balanced and afloat. It is not only imperative for these two trading partners, but for the future of international trade.
posted @ 08:04 AM CST [link]
Friday, September 11, 2009
Is the Recession Over? Yes, but . . .
Almost everyone who has ever taken a long trip with children can recall hearing the pleading question, “Are we there yet?” The answer often varied from “Not yet” to “Almost” or “It won’t be long now.”
What answer can be given to an economically-related question such as, “Is the recession over?” Real gross domestic product, our standard measure of total economic activity, will almost certainly rise in this quarter. Thus, the simple answer is “Yes!” Given that most of us don’t eat, wear, live in or retire on the gross domestic product, however, it is doubtful that we will feel all that secure just yet. We’re in that early stage of the recovery where signals are mixed and the daily ebb and flow of information will point in every direction, but the weight of the evidence now clearly points to a comeback.
A few examples will illustrate this phenomenon. For the April-June quarter, productivity swelled at the fastest pace since the summer of 2003. The 6.6% rate was a far cry from the 0.3% noted in the first quarter of this year. That tells us that businesses are beginning to produce more, but that hiring hasn’t picked up yet (productivity is measured as output per worker). It is both an encouraging sign in and of itself, and a necessary precursor to hiring.
A mid-summer report indicated that home sales had picked up to the highest point in a couple of years. Contracts for pending home sales have now risen for six consecutive months. Although construction fell in July about 1.0%, seasonally adjusted single-family homebuilding climbed 1.6%.
In August, manufacturing achieved growth for the first time in more than a year and a half, and new customer orders climbed to a level not seen since late 2004. In addition, August sales figures for the auto industry showed a marked improvement. Even though sparked by the “cash for clunkers” program, it still was the first year-over-year monthly gain since October 2007 and showed us that, with a little encouragement, consumers would make major purchases.
Less than favorable data, however, can be seen in some areas. Foreclosures are still being announced in many parts of the country. Although factory orders increased slightly in July (the fourth consecutive monthly rise), orders for nondurable goods did not follow suit. Instead, they experienced the sharpest drop since December 2008.
Of special importance to the nation’s seniors is the news that no cost-of-living increase in Social Security is expected for next year. This situation is a change of pace from recent times during which recipients have become accustomed to the annual pay hikes designed to combat the escalation in the prices of so many products and services. With the recession putting a damper on inflation, there is no adjustment this year. On the other hand, overall costs have not risen either.
We have just celebrated Labor Day, which was originally established more than a century ago to honor the labor movement and publicly recognize its importance to the budding industrial revolution. There is no denying that American workers today are the best educated and most experienced and productive in the world.
Fortunately, the number of people losing their jobs has been declining over the past few months. Mass layoffs decreased 22% in July from June’s pace, and new jobless claims are dropping. Still, the total without jobs is staggering—more than six million people are now relying on unemployment benefits. Moreover, we are likely to continue experiencing significant job losses in the next few months. Hiring is always one of the last indicators to turn positive during a recovery. Employers want to feel confident that the upturn has staying power before committing to new jobs.
Thus, there is an abundance of evidence that we have made our way through the worst of the recession, and that a technical recovery (growth in gross domestic product) is underway. However, that does not mean that rough economic times are completely over. With the job market sluggish, many homeowners concerned about their mortgages, and stock prices not fully restored, many folks don’t feel all that rosy just yet. In light of that situation, it seems that the best answer to our initial query is “Yes, the recession is over, but it may be a while before you feel it.”
posted @ 08:06 AM CST [link]
Friday, September 4, 2009
An Enduring Legacy
Some observers have remarked that the passing of Edward Kennedy has forever closed the doors of Camelot, referring to the idyllic life of the Kennedy clan, which came to national prominence in the 1960s. Although the final brother of the Kennedy family has now been laid to rest, there is no doubt that he will long be remembered for his myriad contributions during his more than 46 years of service in the US Senate. His career there has been compared by authorities of all political persuasions to the likes of Daniel Webster and Henry Clay.
Undoubtedly, Senator Kennedy’s legacy will be highlighted by the leadership he provided in ensuring the passing of legislation on many fronts. My focus is on the issues that impacted the economy in fundamental ways. From immigration to education to energy efficiency to health care, the senator was either on stage, behind the scenes directing, or in the front row applauding those who sought to improve our society. He frequently worked with colleagues across the aisle (both members of Congress and Presidents) to forge compromises that allowed key issues to move past the gridlock that often plagues the legislative process. As a result, many moderate and very useful changes occurred.
His support of disability legislation put possibilities for financial security within the grasp of those living under these limiting conditions. His efforts to ensure that high quality education programs be made available for all, especially the disadvantaged, put a new face on the general complexion of employment opportunities for those seeking to make a living and thereby make a contribution to the nation’s economy.
A special hallmark of Senator Kennedy’s nonpareil service record relates to his support for clean, renewable energy sources and increased efficiency in energy use. Greater energy security is certainly in the long-term interest of the nation and its people, and some portion of that must come from alternative sources. As a vocal proponent of human rights and social justice, Kennedy also paved the way for creative legislation designed to improve the lot of workers who are the backbone of our nation’s economy.
Senator Kennedy’s concern for his fellowman and his unwavering goal of enabling Americans to live productive lives was the foundation that supported the building blocks for all his actions. Perhaps evidence of this is nowhere more apparent than in the efforts he undertook to promote programs that would provide quality, affordable health care for greater numbers of people. While Chairman of the Senate Health, Education, Labor, and Pensions Committee, he was a driving force in keeping the health care needs of all Americans at the forefront of public attention. Even after vacating that position, he remained the “voice” of health care reform among his colleagues and other like-minded individuals. The State Children’s Health Insurance Program (SCHIP) is a prominent example of his impact.
Providing for others and enabling them to be contributing and productive members of society was the essence of Senator Kennedy’s life and long and distinguished career. As the “Lion of the Senate,” Kennedy’s voice was always relevant in trying to improve the conditions of others. Indeed, his political career was one devoted to supporting and championing causes that would uniquely impact the American way of life. Like virtually everyone who reads this, I had issues where I agreed with him and those where I didn’t. I was always struck, however, by his unique ability to work in a bipartisan manner to get things done. We could certainly use more of that. He will be missed, but his dreams will live on in the actions of those who follow.
posted @ 07:58 AM CST [link]