Update on the Economy: End of August 2009
Since we began this column at the beginning of February 2009, we have tracked a number of different topics, all of which impact economic growth and our personal financial health: credit card debt, employment levels, the housing market, government stimulus packages, and various investment vehicles to name a few. As we approach the first anniversary of the visible signs of the recession which firmly took hold last September, its time to take a look forward and attempt to anticipate what to expect in the weeks and months ahead. As always, the comments in this article are my personal opinions, and my objective is to offer food for thought in making the important financial decisions which impact each of us and our families.
In recent weeks a few of the various economic indicators have provided some signs of progress in defeating the effects of the current recession. The stock market indicators have all been positive, housing prices have inched up compared to prices in the previous months, and retail sales have stabilized after many months of stagnation or decline. While there has been very positive financial press regarding turning the corner on the economic crisis, and the worst of the recession is over, it is very important to look for continuing signs of improvement before concluding that we have returned to business as usual. Specifically, the employment data and the Federal budget deficits continue to be of major concern.
The chart above tracks job losses in the 1990 recession, the 2001 recession, and the current recession. While the data in the chart shows current recession job losses heading to 4 million, we have actually exceeded 6 million job losses since December 2007 when this recession began. The next scheduled report from the Bureau of Labor Statistics is on September 4, 2009. The expectation is for job losses to continue, however hopefully at a declining rate per month. Our economy grows through the creation of new jobs, and through increased productivity. You may note in the above chart that in previous recessions job losses leveled out more quickly than they have this time, which gives me added cause for concern. We can see that there has been no new job creation for many months, and there is none anticipated in the near future.
Interestingly, in recent months productivity reports have shown month over month improvements as more and more people perhaps fear the possibility of losing their jobs and have stepped up individual efforts. While productivity levels are very important, they cannot carry the burden and we need to see job creation return before we will see lasting economic growth.
The Federal budget faces huge deficits for the 2009-2010 fiscal year as a result of the economic stimulus package, the bail out of banks and brokerage houses, and the continuing uncertainty regarding the costs of these efforts. The estimate as of this writing is for a $1.6 trillion deficit this year. Remember, the deficit is the amount by which we have increased the national debt during one fiscal period, and the national debt is the total amount we owe to creditors who have purchased the bonds we sell to raise the money we spend. Unfortunately, our total national debt has passed the $11 trillion mark. Of additional concern is the fact that nearly half of our debt, 48%, is owned by foreign entities with China alone holding 11%.
With such a large portion of our debt in foreign hands, we need to be very conscious of interest rate levels. This is because the foreigners who own the debt are also investors, seeking the greatest return on investment. Therefore, if interest rates become more attractive in other markets such as Europe or Asia, these foreign investors could decide to sell our debt and purchase investments elsewhere. This of course would mean that rates would have to rise to the level that would be attractive for investors to step in and buy our debt. Currently interest rates are very low; driven to these levels artificially by the FED to help sustain the economy during the financial crisis. My opinion is that rates cannot go much lower because we cannot risk losing the foreign investors who hold our debt.
Taking all of the economic indicators into consideration, we have a mixed picture going forward. Some improvement in housing prices and stock market performance; and some concern regarding unemployment and job losses, and with government spending levels that have sent our national debt to new record levels. The result in my opinion is that we need to remain cautious regarding personal finances. Much depends on our individual situations: if we are near retirement and have little flexibility we need to remain in more conservative investments which preserve capital and allow us to plan more accurately; if we have many years until retirement we can selectively choose investments with greater risk parameters (such as stocks & real estate), because we have time on our side; if we are looking to provide college savings or to secure a down payment for a home, that again calls for a more conservative approach.
There are always opportunities to invest. During the Great Depression there were stocks that actually went up in value and there was real estate that performed very well. Thorough investigation of the alternatives and defining our threshold for risk will help to choose the best alternatives.
©Patrick J. Catania 2009 The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances. We welcome your feedback and ideas regarding this service. To submit a comment or idea for a future article, please email us at firstname.lastname@example.org