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Economic Stabilization, Recovery Or What?

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Economic Stabilization

Economic Stabilization May Be Happening Right Now, or Not.

It appears that both the domestic and global economies have entered a period of stability after a fairly large decline. There have been strong rallies in both the equity and debt markets. Many true believers are declaring that the global financial crisis is over! 

“Green shoots” seem to have cropped up everywhere. It’s been widely publicized that there has been a slowdown in the rate of decline in key economic indicators, improvements in the financial system, strong government support for the banking system, interest rates near zero percent and, lastly, unprecedented fiscal stimulus packages. All these lead to hopes for a swift return to growth.

It’s puzzling that real economic indicators continue to be poor and that growth forecasts for this year have consistently declined. For 2010, world growth is still expected to be negative. World trade continues to be weak. Consumption, industrial output and investment are lacking strength. Employment continues to deteriorate and unemployment continues to rise. Japan and Europe are floundering, and China has experienced a fall in exports of over 20 percent in the last year.

The global economic and financial crisis has had a significant negative effect on the wealth of individuals, with more than $30 trillion in value being destroyed in the U.S. alone. Housing prices have declined precipitously and many owners are under water from an equity viewpoint. Investment income and dividends have declined sharply for both individuals and institutions. Banks still have tons of toxic assets on the books and are still experiencing extraordinary losses. Credit card debt is still out of control and losses due to credit card debt are still mounting. Commercial real estate is in a crisis, with a large percentage of properties under water, but yet to be declared.

In our country, hundreds of banks are closing this year. As of the end of the second quarter there were 416 banks on the FDIC’s problem list, up from 305 as of the end of the first quarter. Has the financial system really stabilized? One can make the argument that it has, but certainly it has not returned to good health. The problems at CIT Group highlight the problems of the financial system and the threat to availability of credit to small and medium-sized businesses, where capital remains scarce.

The federal government has passed so many spending plans, bailouts and stimulus packages that it is hard to keep track of them all. The impact of fiscal stimulus packages, spending and bailouts has been variable, and the rate of return on government spending programs, many of which are politically motivated, is unclear. Government bailout packages for the automobile and housing industries, however well intentioned, are only delaying much-needed capacity adjustments and risk prolonging the problems.

The government spending programs can’t be kept up forever, as proven by the impending problems with Social Security and Medicare. The Cash for Clunkers program was a total waste because all it did was cause people to buy cars earlier than they otherwise would have. If the program hadn’t been enacted auto sales would have continued to flounder, but there is good reason to believe that future auto sales will suffer because consumers only bought in order to get a great deal that might not show up again. If prices are coming down, shouldn’t we be worried about deflation? What will happen to the economy when taxes get raised? When will the bailout spending end? Will the U.S. economy become like the economy of Japan during the ’90s?

The cost of health care reform has been publicized at $1 trillion. There’s a lot of smoke and mirrors being used to make it look that low. It’s more likely going to cost $3 trillion, which means that our budget deficits will be $2 trillion higher than estimated. President Obama’s spending spree and budget numbers have gone mad. The Obama administration recently announced that the U.S. budget deficit will be $9 trillion during the next decade – $2 trillion higher than the original forecast. That doesn’t take into consideration the cost of health care reform either. There is runaway government spending that must eventually be reined in, but neither the president nor Congress has the will to do it at this time. This is a long-standing problem that it’s just not politically correct to solve. So as a country we’ll continue to deny our problems in the hope that they’ll go away. But they won’t; they’ll just be left for a future generation to solve.

What all the above will mean for the future, no one knows. Maybe the global economy has entered a period of stability after a fairly big decline. But since when is market sentiment shaped primarily by facts? Maybe we’ve been down so long that it feels like up? If so, we may be mistaking stabilization for recovery. 

Jack Lyons

Meet the Author Jack Lyons

Jack Lyons has written 11 Articles on Small Business Delivered.

Jack Lyons founded Lyons Solutions, LLC (a Merger and Acquisition Advisor firm) in 1984 and has sold more than 85 middle market manufacturing, distribution, healthcare, staffing, consulting, marketing, and professional service companies in over 25 states. www.lyonssolutions.com

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