Economy: It's Worse Than We Think

The evidence is mounting that the American economic downturn is going to be much worse than generally thought. A downturn that was thought to see unemployment at 8%, which is a recession level, is seen now to have an easy potential of 9% or 10%--levels not seen for decades--a deep recession.

Here are the culprits:

• Falling home prices are not showing signs of stopping. This quotation from the AP sets the latest news:

The number of homeowners caught in the wave of foreclosures in October grew 25 percent nationally over the same month in 2007, data released Thursday showed.More than 279,500 U.S. homes received at least one foreclosure-related notice in October, an increase of 5 percent over September, according to RealtyTrac Inc. One in every 452 housing units received a foreclosure filing, such as a default notice, auction sale notice or bank repossession.

More than 84,000 properties were repossessed in October, RealtyTrac said.

A nasty brew of strict lending standards, falling home values and a tough economy is filtering through the housing market. By the end of the year, the company expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

The problem with home foreclosures is that once the mortgagee takes them over, the prices falls much more than if the home had been sold while occupied. Repossessed homes tend to sit vacant for longer, deteriorating and bringing down the entire neighborhood as they fall further into to disrepair. This puts pressures on all the other homes in the neighborhood, making it more likely that other owners will walk away from their mortgages which may be twice the current market value. It is a vicious cycle, and once started, it spirals quickly down.

• Lending standards have tightened to the extent that many consumers can no longer get automobile or furniture loans. This is pushing General Motors, Ford and Chrysler into bankruptcy, imperiling over three million jobs in the process.
• Rising unemployment is sapping the spirit and incomes from ten million Americans right now. This has a tremendous effect on the morale of everyone they know and everywhere they live. Unemployment is a killer for spending plans. Those unemployed tend to pull back significantly on their spending, and their gloom spreads to their friends and relatives. It is contagious and destructive and will kill consumer spending which has, for the last five to ten years, been the mainstay of the American economy. An AP report released today (11/13) shows the extent of new jobless claims:

The number of newly laid-off individuals seeking unemployment benefits has jumped to a seven-year high, the government said Thursday.

The Labor Department reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That is the highest total since just after the Sept. 11 terrorist attacks and second-highest since 1992.

The total was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000.

The four-week average of claims, which smooths out fluctuations, rose by 13,250 to 491,000, the highest tally in over 17 years.

Thursday's figure is the first time claims have topped 500,000 during the current economic slowdown. Jobless claims above 400,000 are considered a sign of recession. A year ago, claims stood at 338,000.

• Falling economies around the world. As the world’s economies fall into below-trend growth, their spending slows down. The buy fewer airline tickets, fewer American cars, less software, and less American wheat. America does import much more than we export. But, we still export a lot, and many jobs depend on them.

the Commerce Department said the trade deficit declined by a bigger-than-expected amount in September, falling by 4.4 percent to $56.5 billion as imports experienced a record plunge.

The import decline was led by a huge fall in imported oil as the average price for crude dropped by a record $12.41 per barrel and the volume of shipments fell to the lowest level in five years. But demand for other types of imports also fell, with imported cars and car parts dropping to the lowest level in more than five years, an indication that foreign automakers are feeling the pinch hitting U.S. consumers.

The feedback loop in this kind of international recession is horrible. U.S. and European economies enter into recession. This feeds back to the emerging markets as a lower demand for their products, thus inducing recession in their economies. The recession there reduces demand in the U.S. and Europe for things they make: airplanes, large computer, computer software, agricultural commodities, etc. This further reduces employment in the U.S. and Europe, etc., etc.

It will take a Herculean effort by all the world’s economies to break this cycle. There is a meeting beginning the 15^th in Washington of the G-20, approximately the 20 largest economies in the world, and they will attempt to address the problem. Probably not much will come of the first meeting since American leadership is in a transition stage that won’t formally begin until January 20. But a second meeting will most likely be agreed to, and at the second one I would expect much better results of a comprehensive and coordinated efforts to bring the world recession under control.

For a more detailed look at this meeting, see my recent article @ http://seekingalpha.com/article/105737-the-g-20-sings-a-song-of-sixpence