Well the stimulus package is finally finished. A tough new bank-rescue plan to boost lending and limit outrageous pay are part of President Obama.. Even troubled homeowners may even get some relief. All said and done, the government could spend more than $3 trillion to help end the recession.
All we have to do now is sit back and watch the economy grow, am I correct?
One risk of the unprecedented government intervention is that it won’t do all that much to speed up the end of the recession. Another risk is that consumers, expecting a magic fix, could fail to prepare for tough times that still lie ahead. Obama himself said at his first press conference. “This is going to be a difficult year, If we get things right, then starting next year we can start seeing some significant improvement.”
Next year? I’m afraid not. A large number of economists agree that it will take that long, at least, before the biggest problems – mounting layoffs, the housing bust, the banking crisis, and plunging confidence – start to turn around. Whether the stimulus package is actually working, and when the economy might start to mend, here are a few things to watch.
Improvement In The Unemployment Rate. Of all the economic indicators, this is probably the single most important. But you might want to avert your eyes for awhile.
If the stimulus plan works it might come close to creating 3 to 4 million jobs which Obama has talked about.. And that – over several years, combined. But it’s almost certain that through this summer and into the fall, there will be a net job loss, not a gain. Most economists expect the unemployment rate, now 7.6 percent, to hit at least 9 percent by the end of this year. That represents up to 2 million more lost jobs.But the pink slips haven’t all gone out yet, so the layoffs haven’t shows up in the official numbers.
The first sign of an improvement will be…corporate silence. Once that happens (or doesn’t), the unemployment rate will plateau. Then, companies might start hiring again, and a couple of months after that, the unemployment rate will start to fall. Three straight monthly declines would be a good sign that the economy is really on the rebound.. In all probability that probably won’t happen until 2010.
If you’re wondering what the point of the stimulus package is if it won’t do much to help workers in 2009, look to 2010. That’s where the plan will make a bigger difference. Moody’s Economy.com estimates that by the middle of 2010, the unemployment rate will start to drift back toward 8.5 percent. But without any stimulus plan, it would have hit 11 percent.
Stable Home Prices. The real-estate boom and bust is what triggered the economy in the first place, and the economy won’t start to recover until the housing bubble fully deflates. The good news is that housing prices have already been falling since more than two years, with a drop of 20 percent in prices nationwide, and we might be half way towards the bottom. Housing prices should stop falling nationwide by the second half of 2009. Overall, the forecasting firm predicts a 30 percent drop in home values from the peak values of 2006.
Once prices stabilize, buyers will stop worrying that they could be purchasing a costly asset that’s falling in value. As they buy, other kinds of consumer activity – like shopping for furniture and kitchen upgrades – will follow.
Rebound In Consumer Confidence. Since consumer confidence closely tracks the job market, the dismal numbers of the last few months probably won’t improve by much until late in 2009, or 2010. Homeowners have lost more than $3 trillion worth of value in their homes over the last three years, and investors have seen their stock portfolios shredded. So even people who feel secure in their jobs are dour.
A turnaround in the housing or stock markets would break the gloom and help some people feel better off. So would easier lending by banks, which would help solvent consumers buy a few more cars, appliances, and other goods. But consumer confidence won’t really start to improve until workers start to feel more secure about their jobs and income. Think 2010.
Less Volatile Stock Market. Every investor hopes that stocks will come roaring back in 2009 and regain some of the ground lost since the peak in 2007 – when the S&P 500 stock index was nearly 50 percent higher than it is today. A better indicator of economic health would be a steady recovery – without the manic swings that seem to come from every hint of undisclosed trouble at some big Bank.
Since the stock market is deeply dependent on psychology and other intangibles, this makes it harder to predict than most other parts of the economy. The market could bounce back by mid-summer. Or it could remain stagnant for years, like it did for most of the 1970s. The experts can’t be any surer than you or I.
One hopeful sign would be less market sensitivity to events in Washington. The biggest market mover these days is the federal government, since fortunes stand to be won or lost – mostly lost – depending on how deeply the government intervenes in the activities of mega banks, and how much federal spending will be available to stand in for plunging consumer spending. Since the government seems to be the only institution spending money so far in 2009, it could be awhile before Wall Street returns to form.
Positive Turn In Economic Growth. By all economic standards, the current downturn has already lasted longer than the typical post-World War II recession Yet there’s still a lot more pain to endure. A recent survey of economists by the Wall Street Journal found that the majority think the economy will continue to contract for the first half of 2009, with growth turning positive in the second half of the year.
It’s always possible that impatient consumers will get sick of holding back, and start running up their credit card balances once again (if the banks let them). The bank-rescue plan might spur more lending than expected, goosing businesses and consumers alike. Or the stimulus plan might spread goodwill and optimism throughout the land. If you get the urge to spend, that might be the strongest indicator of all.