The U.S. and global economy will get better, perhaps as soon as the fourth quarter of 2009. But before the worm turns, it's likely to eat further into employment numbers and the health of crucial industries such as housing, banking and auto manufacturing.
Bob Young, chief economist, American Farm Bureau Federation, speaking at the Beltwide Cotton Conferences in San Antonio, said U.S. job losses likely will continue through the second and third quarter of 2009, as will a “soft economy.” Improvement could begin in late 2009 or early 2010, spurred by low interest rates and an expected economic stimulus package from Congress.
There is a lot of ground to make up. Young showed graphs depicting the capitalization of the world stock market from 1995 through October 2008. Capitalization peaked in late October 2007, at $63 trillion. In late 2008 that number had dropped to $33 trillion.
“Some $30 trillion just went pfffttt,” Young said. “Was the 2007 peak out of line and is the 2008 correction right? That's what the market is telling us.”
He said employment numbers showed significant growth in the mid 2000s but declined sharply beginning in 2007. “The economy was killing off jobs at a substantial rate in 2008 with upwards of 2 million jobs lost.”
He said massive layoffs and restructuring will continue into 2009.
The automobile and housing industries have been severely stressed.
Young said automobile and light truck sales, at 8 million units sold through November 2008, represent the lowest level since the early 1980s.
“With the recent stimulus to the auto industry, we've seen no pickup.” He said companies are furloughing employees into January.
Young said the housing market also is in a decline trend not seen since 1959. He compared housing starts in 2008 to the number of house fires in 2006, the last year figures are available.
“In 2006, fire departments across the country responded to 406,000 house fires. Housing starts through November 2008, totaled 441,000. “We need from 1.5 million to 2 million houses per year to keep up with population growth, but we're only replacing the number lost to fire.”
He said within nine to 12 months the housing decline could find a bottom.
The energy sector also witnessed a collapse late in 2008. “That collapse resulted in a stimulus package for consumers.” The stimulus checks taxpayers received last year were eaten up by high energy bills, he said. “Considering the amount of the checks and the increased cost of gasoline over a certain number of months, we can see almost a straight transfer to energy companies.”
Young said a significant part of the economic malaise comes from loss of faith in lending institutions. He said the London Inner Bank Offer Rate (LIBOR), the rate banks charge when lending to each other, typically has a gap of about 55 basis points with treasury bills. In September 2008, that gap was up to 450 basis points.
“When banks don't have faith in other banks they are not willing to loan to each other,” Young said. That gap has narrowed some since September, but the three-month t-bill remains at a low rate of zero to one-half percentage point. “It seems everyone on the planet has faith in nothing. They trust the federal government just to hold money and they get no return on the investment.”
He said lack of faith makes it difficult for companies to find money. Lenders are unwilling to take risks. “It's been difficult for automobile companies to get money.”
Young said three factors will affect consumers in 2009: loss of wealth, loss of credit and gasoline prices. Loss of wealth results in a $275 billion hit to the economy. Credit loss means a $225 billion hit. Lower gasoline prices result in $200 billion to the good.
Overall, the three factors result in a $300 billion loss to the U.S. economy.
Young expects a stimulus package, “sooner or later.” Available money will mean construction project contracts available from the states and then bids going out and coming back in. By late 2009 or early 2010, those projects should begin to kick in and help move the economy. He's concerned that a stimulus and a surge of money could result in inflation within 12 to 18 months.
“We need to watch for it.”