Does the economy get worse from here or do the government programs recently signed into law increase confidence and start to put capital to work to create jobs and build businesses? In a downturn the bottom is only noticed after the fact. Data on employment, consumer spending, and capital expenditures often follow what has actually happened by months.
The Federal Reserve has said that it now expects unemployment to hit almost 9% by the end of the year. But, the point at which the economy begins to turn around is not when joblessness hits its peak. This inflection comes when the rate of the increase in firings begins to slow. The most important moment in a downturn comes not when the damaging contraction's momentum has come to rest but when its progress has begun to slow. (See pictures of former Fed Chairman Alan Greenspan.)
In March, a number of actions will occur that will be critical to demonstrating whether the economic disaster will get much worse. The first is that the issue of the nationalization of the banks may well be resolved. The debate about the issue has already hit a fevered pitch and if the first quarter is going to bring another series of multi-billion losses, institutions including Citigroup and Bank of America (BAC) may simply not have the balance sheet strength to remain independent. While having the government seize one or two major banks may ultimately be the key to their survival, the public may instantly suffer a huge loss in its confidence in the rest of the independent banks, brokers, and money managers in the country. There has not been a collapse in confidence in banks since the Depression. While there may not be a great deal of logic to heightened fear about the future of banks if the government ends up owning a few of them, the psychological effects on consumers could be devastating.
The fate of Detroit will probably be determined next month. GM (GM) and Chrysler submit their restructuring plans to the Treasury and Congress. The UAW and creditors have not given enough in terms of concessions so far to make the government comfortable. If the GM plan is approved, 47,000 people lose jobs. If the plan is not, the number could be much larger. A bankruptcy of America's largest car company could not only lead to huge increases in the number of people out of work; it could leave a gaping hole in the confidence people have in the government to solve economic problems. (See pictures of Detroit.)
The housing market's sharp drop should start to benefit from the approval of a program to funnel $275 billion into mortgage modifications. The simple fact that such a large safety net may be set up under housing prices ought to help arrest foreclosures and substantially slow cascading housing prices.
Taxpayers will also be looking forward to benefits from the drop in the taxes that they pay to the government. One of two things will happen. Most of the money will go to savings and paying debts or it will work its way back into the economy in the form of consumer spending. A lot of data about car sales, unemployment, exports, capital goods, retail spending, and consumer confidence will come out next month. None of it will say much about the future. It will really only reflect what has happened in the economy since the beginning of the year. But, March is the month when the cement will be poured for much of the balance of the year. If most of the negative trends which have already wrecked the economy continue to accrue, the recession will get much worse and push well into 2010.
Douglas A. McIntyre
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