The Almost Daily 2¢ - Recession Era Ramblings

Now that we are likely several months into the latest recessionary contraction it seems fitting to start to consider some of the known and possibly not so well known factors that may contribute to the severity of this period.

Rather than go into a lengthy analytical survey of some housing and economic data with charts showing correlations and past recessionary periods and the like, let’s instead simply consider some aspects of our current circumstances and then speculate a bit in an attempt to flesh out some perspective.

First, it’s important to consider that housing slumps are very large macroeconomic events.

For all the perpetual talk of “bottoming” and potential signs of recovery materializing in this half or that half of the year, there is no evidence to suggest that housing has ever experienced a quick bounce back after a tumultuous slowdown.

To the contrary, significant corrections in housing are generally associated with prolonged periods of stale growth where home price appreciation stalls while the general economy struggles to regain its footing, overcoming troublesome issues like high unemployment, problematic inflation, structural changes in lending markets and so on.

In a sense, the economy will first need to become truly healthy again and, even further, show signs of prospective growth before housing can re-establish any form of sustained price appreciation.

Considering that we are only just on the verge of this recession and that unemployment has only just begun its ascent, I believe that a sustained recovery in housing is more than a long way off and moreover that the true tests lay perilously ahead.

Substantial and sustained unemployment has the potential to change the face of the downturn in a way that’s far more significant than can be the result of an epidemic of “you walk away” mentality.

We know that many millions of American households are over-leveraged, having swilled at the trough of easy credit for decades with the final outsized gorging culminating with the housing mania, but what is not as well known is the current households ability to maintain through a prolonged bout of unemployment.

My hunch is that the typical household, especially the middle-class dual income professional household, is woefully unprepared.

One of the more destructive side effects of the housing run-up may be that dual income households are now extremely reliant on both incomes to make ends meet.

So rather than two sources on income diluting the risk of unemployment as would have been the case if households lived well within their means, dual income status may, in fact, result in a greater risk of insolvency for households that scaled their lifestyle to meet (or even exceed) their combined earnings.

Another point to consider is that with the 72% services-based economy may come a foible of specialization.

Professional service workers today are likely far less able (and willing) than past generations to generate equivalent income in another discipline should their primary role go unneeded.

Although American workers are all likely capable of retraining, any significant disruption to any professional services sector may result in a long and arduous period of retooling for unneeded workers.

In a sense, all I’m suggesting is that past generations of more common laborers (manufacturing, etc.) could find similar pay for work of other sorts that relied primarily on their willingness to toil physically, whereas today’s workers specialize in one business process or another and quite possibly could be completely unprepared, both psychologically and in skill, for a significant change of career.

So what would happen if through this downturn there is a further realization that many service sector jobs are simply unnecessary? (…as an aside, Scott Adams Dilbert strip always seems funny to me particularly because, like all good comedy, its parody is essentially true.)

I think this is a real threat and the anemic employment growth seen since the dot-com bust, I believe substantiates this potential.

For the first time in at least 60 years, a post recessionary expansion has failed to (adjust for population) re-populate payrolls to at least meet the trend defined by prior expansions before turning lower again in the face of the next recession and although there may be alternative explanations (aging population, independent workers, etc.) I believe it is really a reflection of an economy that was NOT fundamentally growing but in fact simply being propped up by cheap debt.

Worse yet, all that debt filtered through the system and are now the obligation of weak firms and even weaker households.