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Despite the end of the recession, future still cloudy for U.S. economy
By Bill Conrad, firstname.lastname@example.org
Economic experts agree that the recession is over, but they differ on opinion as to what lies in the future. The recession was recently declared over by the National Bureau of Economic Research.
The bureau said the economy reached its low point in June 2009, which was the official end of the recession and the beginning of economic expansion. The recession lasted 18 months, making it the longest since World War II. Prior to the recent recession, the two longest post-war recessions were 16 months long and occurred from 1973 to 1975 and 1981 to 1982.
A recession is defined as two consecutive quarters when the United States gross domestic product falls. The bursting of the U.S. housing bubble and the collapse of the subprime mortgage industry in 2006 and 2007 led to a 0.7 percent decline in GDP for the first quarter of 2008. The GDP grew 0.6 percent in the second quarter of that year before declining for four consecutive quarters, with the biggest decline being 6.8 percent in the final quarter of 2008. The economy began to grow again from July 2009 to September 2009 and has posted positive growth since, including 1.7 percent in growth during the second quarter of 2010.
With the U.S. economy experiencing slow – but positive – economic growth, what does the future hold?
Nathaniel Karp, chief U.S. economist for BBVA Compass, said he believes the country is on the right track and will continue on a path of recovery.
“The stimulus package did what it was designed to do, which was avoid a depression – which is where we were headed,” Karp said. “Several years ago, there was no assurance that the largest banks were not going to fail. People were worried about who was going to be next. Wachovia and Lehman Brothers went down and people thought that Citibank might follow. The main objective of the stimulus and the new economic policies was to avoid a depression, increase business and consumer confidence and stabilize the economy so that the private sector can take over the recovery.”
The private sector continuing the recovery is an important part of the process, according to Karp, and something that is necessary for continued growth. Karp said he believes a second stimulus package is not necessary and would not be effective.
“With the government intervening, you are borrowing from future generations,” he said. “The price you are paying is higher than if the private sector had done it right away, but that was not going to happen. The package filled the gap that the private sector left. We accomplished the first step by stabilizing the economy, and now we should let the private sector carry forward. Any other stimulus package wouldn’t have the same meaning and impact. Right now we are not facing a meltdown and are not facing a depression. In addition, there is still money unspent from the first stimulus.”
Barring unforeseen circumstances, Karp said the economy will grow slowly, but it should continue to grow.
“Back in the early 1990s, no one saw the telecommunication revolution,” he said. “In the absence of some miracle or something that is difficult to predict, our baseline scenario assumes that we have a slow recovery. We have to live with that. We have to adjust to that reality, and that means a slower rebound to everything. This is healthy growth.”
Although Karp sees the economy continuing with positive growth, Addison-based financial planner Mike Reppert, a partner with Spectrum Advisors, fears that the United States may be headed for a double-dip recession. Reppert cited the high unemployment rate, a widening U.S. trade deficit and the second-lowest month of new home sales on record.
New home sales in August totaled 288,000, according to the U.S. Commerce Department and the U.S. Census Bureau. That number was the second lowest since records began being kept in January 1963. The only lower month was May 2010, where new home sales totaled 282,000.
“A double-dip recession is when the economy recovers then retreats back to negative GDP after a short-lived recovery,” said Reppert. “I think that is what we are looking at right now. The recovery would not be long enough to fix all of the fundamental problems, but would be long enough to give us ease of hope. I am a very positive guy, so I don’t want to create a lot of alarm. But for my clients, I want them know that we need to be posed for other things to come. We don’t want to just say that everything is good and leave everything as is.”
Reppert said the private sector could pull the country out of the current financial situation, but that would require people to spend their own money rather than money provided by the government in the form of stimulus funds.
“People are going to have to decide whether to spend their money based on what they think is coming,” he said. “If everyone would go and spend more freely, we would work ourselves out of this situation. On the other hand, the companies that employ people are going to have to keep hiring, but they are going to have to see profitability in order to do that. It is a cycle of the individuals versus companies, and they both have to be working together in order to really pull us out.”
Reppert said if unemployment stays high, he is worried that more people are going to default on their house payments, causing more foreclosures. It is this domino effect that he believes may lead the country back into a second recession.
The job market did get one piece of good news last week, as jobless claims fell for the third time in four weeks. Applications for jobless aid fell to 453,000, down from 469,000 the previous week. Still, the unemployment rate remained at 9.6 percent in August, virtually unchanged from July.
Status of jobs in America
Even with the recession officially over, it will be years before the jobs lost in the recession are completely regained.
“I think we are already seeing the job creation in positive territory, meaning more people are being hired than laid off,” Karp said. “However, this is happening at a very low rate which is going to continue for several years. During that time, unemployment will remain high. During the boom years, unemployment was 4 to 4.5 percent. Right now, we are at nearly 10 percent – and that number could be higher since some of the people who lost their jobs have quit looking.
“People that were laid off took the option of getting more training or going back to school. As the economy recovers and more jobs are created, more people will return to the labor force and the unemployment rate will not decrease very quickly.”
Karp said one of the main areas that create jobs is construction, which is still slumping. With construction at a low point, the real estate market is also suffering. Karp said the areas of the economy that are currently hiring are not labor intensive.
“What else is out there to create jobs? There is nothing that you can really single out,” Karp said. “It is a mix of sectors, and many of the sectors that are at the core require highly skilled employees. These jobs include information technology, research and development and the pharmaceutical and hospital industries. The other main job-creation sector is manufacturing, which is recovering at a slow pace. Manufacturers had high production during the boom years, and now they have excess capacity. Why should they invest money in the company and hire people when they have all of this excess?”
As jobs begin to return, Karp believes the United States should focus on what it does best.
“We have the best university system in the world,” he said. “We do most of the world’s research and development, and we should focus on that. I think the way out of our current situation is to focus on technology, innovation and productivity. Look at the 1950s, 1960s and 1990s; those are the things that drive the economy. We don’t want to compete with China to see who has the lowest wages. We want to compete and see who gets to discover new health care innovations, energy sources and IT breakthroughs.”
Lessons to learn
What lessons should Americans take from the recessions?
Reppert said there are a few things everyone should be doing right now, regardless of income or job status.
“People should be cutting their lifestyle now in order to get as low and lean as they can from an expense standpoint,” he said. “Instead of going out and having additional good times, they should put all of their excess money toward reducing and eliminating debt. I think that there is this false sense of hope right now and people are increasing discretionary spending, while they should be reducing debt and expenses.
“People should also be saving money. I know a lot of people don’t have an emergency fund, so if they lose their job, they are in a world of hurt real quick. People should save cash in a liquid bank account or money market and not worry about earnings, but just have some money saved. Those are the two primary things that everyone should do.”
Reppert said that people with investments should pay close attention and consider changing their investment strategy.
“I think that investments are an important part of financial planning,” he said. “A lot of people lost a lot of money when the last recession began because they were not paying attention. Once it began, it was too late for them to reposition without a loss. I am recommending to our clients to reposition to more conservative places and assets. If they need the money, they should not be putting it at risk beyond what they can afford to lose.”
Reppert also suggests retaining the services of a financial adviser to help manage personal finances.
“I think some people have to get hurt bad before they realize they need some help with their investments,” he said. “One problem is that not all financial advisers are good at their job. There are ways to check out advisers to make sure you are getting good help.
“If an adviser charges a fee to a client, they should be able to more than make up for that fee with the advice they give. You also want to make sure you have an experienced adviser that has been through economic adjustments and understands the ups and downs of economic changes.
“I would also make sure the person works for the client, not for a company that tells them what to do. This is very important. You also need to ask for specific results of what they have done for clients over the past five years and get references. Those would be ways to safely use an adviser. We are only worth our fee if we can earn our fee back, plus something else.”
Karp echoes Reppert’s thoughts, saying the moves people make now should be continued after the economy recovers.
“Households should be adjusting their finances, increasing savings and lowering debt levels,” Karp said. “Prior to the recession, the savings rate for a lot of people went down to 0 percent and people were using their savings like ATM machines. We need to get back to the fundamentals. Before the recession, people were going crazy with some of their spending habits and debt habits. The risk taking was extremely high. We are paying the price for that, but fortunately, we can adjust to move forward in a sustainable manner.”
Karp said the median time a person is unemployed is six months. In the past, experts recommended saving three months’ worth of income as an emergency fund. Karp said people who have jobs now should be saving six months’ worth of money, since they cannot be sure what the future holds.
Consumers should also be careful about engaging in risky investments, according to Karp.
“There is no such thing as a high rate of return with a low risk,” he said. “If you want higher returns, you have to take higher risks. People thought the opposite, but that proved to be wrong.”
Both experts also agree that no matter what the government does regarding raising or lowering taxes, government spending must be decreased. Both said the increasing national debt is unsustainable and must start to be reversed.
“We all know that lower taxes and a more efficient government has been very beneficial for strong growth,” Karp said. “If we are going to start increasing taxes and public spending, I am not sure if the potential growth rate is going to be as high as it could be.”
Reppert said he is not against letting the Bush tax cuts expire for the upper class, but if that is going to happen, government spending must be cut in return. If spending is not cut, raising taxes will not have the desired effect.
While no one knows exactly what the future holds for the economy, incorporating the financial changes recommended by Reppert and Karp will mean people will be in better shape, whether the economy continues to grow or a second recession occurs.
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