Dolan Media Newswire Story
Subject: Economists read the same tea leaves, arrive at different conclusions
Pub: Finance and Commerce
Author: Mark Anderson
Category: Economy
Sub-Category: American Economy
Issue Date: 05/14/2008 Word Count: 48
Economists read the same tea leaves, arrive at different conclusions
by Mark Anderson
Dolan Media Newswires
© Dolan Media Newswires 2010.MINNEAPOLIS, MN -- Strictly speaking the economy still hasn't fallen into recession, at least not according to the classical definition of an economy that's spent six months in decline.
But Mike Doyle says we'll be there soon and, once there, we'll probably languish for a while.
Doyle was chief credit officer at U.S. Bancorp until last summer when he left to launch his own advisory business, Credit Risk Advisors. Last week he was playing a different role as a pessimist on a panel organized by the Oppenheimer Wolfe & Donnelly law firm to examine the economy, the likelihood of recession and the ability of consumers to spend us out of the trouble we're in.
Doyle's sober answers to those questions grow from his opinion that the fat and happy period of very low-cost, very easy credit lasted too long.
"We've been in an expansion for 64 months already, which is long period relative to what we've seen in the past," Doyle said.
That long expansion gained fuel from the high-octane activity that investment bankers brought to the capital markets in the last few years, parlaying a package of new and evolving securities products into a dramatic boost in the credit markets.
One of the most significant outcomes of that aggressive capital approach was to bring legions of new home mortgage borrowers into the market.
As we all know now, though, neither the loan underwriters nor securities investors paid much attention to the likelihood of those borrowers repaying the mortgage loans.
A tidal wave of foreclosures followed, and the inevitable response to that calamity was a constriction in new credit.
That combination of tight credit, a continuing cascade of foreclosures — Doyle expects those will continue for as long as 12 months — and emerging problems in student loan portfolios, commercial real estate securities and leveraged commercial loans all point to broader economic problems.
But the biggest worry outside the residential market may well be the credit card market, where defaults are growing and expansion is occurring not from new customers but from existing customers who are going deeper into credit card debt to replace their loss of home equity.
Those credit sources will tighten soon, too, "and when that happens consumers won't have the ability to get debt to feed consumption, and the impact of that will be felt across the whole economy," Doyle said.
And that's when the recession will have arrived, and Doyle said he expects it will remain until the second half of 2009.
On the other side of the economic aisle, Mike Hemesath, chair of the economics department at Carleton College in Northfield, sees hope in some of the same factors that worry Doyle.
The dour forecasts that most economists are issuing now are based on an anticipated collapse in consumer spending, which will occur when homeowners are no longer able to borrow against their home's value.
But the impact of the residential collapse and the dried-up home equity lending won't be as virulent as many economists predict, Hemesath said.
Better-than-expected data on both jobs — a slight reduction in April after hefty first-quarter declines — and consumer spending — up 0.4 percent, which doubled analysts' predictions — are small but significant signs that the economy is stabilizing despite continued bad news from the housing market.
Those positive developments in a market whose broad fundamentals are still stable should create a stronger spending environment later this year, Hemesath said.
"The expectations of consumers matter a lot, and I think the fact that we're not in a recession after hearing for many months that that's where we're heading will give people more confidence about spending."
Hemesath cited one more somewhat unconventional source for hope: Participants in the online betting pool, InTrade.com, have backed off their heavy wagering earlier this year that a recession would occur.
"It's just another indication about where the collective thinking is heading" in the wake of some of the biggest economic changes in a century, he said. "It's important to try to read what consumers are thinking, but in these circumstances it's not easy to figure them out."
Those signs of incipient confidence are going to have to weather more bad news before they trigger a full-blown recovery, Doyle said.
This downturn will be broader-based than recent recessions such as the commercial-real-estate-focused 1990s downturn, he said.
"We're seeing huge problems in residential markets now, but those are starting to domino into credit cards, some commercial real estate and leveraged loans on the commercial side," Doyle said. That combination of events creates more hazards and less traction for a stumbling economy.
Many lenders are also going to have difficulty providing the fuel for new economic activity, because of the securities and mortgages that remain in their portfolios, which the market still hasn't been able to price.
Many of those lenders are also going to be preoccupied with the arduous task of unwinding all those existing credit issues, Doyle said. "If you've got a financial institution that's fighting all these fires at once, you get really internally focused and it's easy to forget your customers."
And if banks are thinking less about providing credit, that slows the economy's ability to rebound, he said.
There's some positive news that Doyle and Hemesath agree on: Energy prices won't pose a major obstacle to an economic recovery. The rapid climb in fuel and food costs related to energy are causing worlds of pain at the pump and the grocery store, but the portion of each household's income that's spent on energy and food has declined substantially in the last several decades, reducing the impact of the price spirals.
"We're a lot less susceptible to an energy shock than we were in the 1970s," when the last great energy crisis occurred, Hemesath said.
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