Double Dip recession is coming
Posted by Mike Sylvester - 8/20/10 @ 3:28 pm - Filed Under 2010 National Elections, Featured, National Politics
“Mainstream” economists are putting the odds of a double dip recession around 20%. I put the odds of a double dip recession at about 80%.
There are many reasons I think the economy will take a turn for the worse in the next year:
- The main reason is that I feel the unemployment rate will fluctuate between 9% and 11% nationally. The Government has spent well over a trillion dollars trying to stimulate the economy and trying to create or “save” jobs. This stimulus has only served to somewhat limit the increase of unemployment. Many economists argue that without stimulus unemployment would be between 12% and 14% at this point. A majority of the stimulus money has now been spent; hence, the effects of the stimulus will diminish over the next year or two.
- The Construction industry is in dire trouble. New home construction has plunged (as it should have plunged). The first time home buyer credit (one of the dumbest policies in recent memory) served to drive home demand forward; in other words it caused some people to purchase homes a year or two early. Now that the tax credit has expired residential real estate is going to be even more sluggish. There are also a large number of houses on the market; so many in fact that few new homes should be built. There are also millions of homes that will be foreclosed on in the next couple of years; once these houses are put on the market housing prices will drop even further.
- Construction is also in trouble due to commercial construction. Commerial construction has the exact same problems listed in #2 above. The United States is overbuilt with both residential housing and commercial buildings.
- I am happy to say the the national savings rate has increased to 6.4%. This is good for the United States in the long term; however, personal consumption is about 2/3 of GDP. The increase in the national savings rate comes at the expense of current expenditures; which in turn drive GDP. The fact that Americans are saving more today actually increases the chance of a double dip recession.
- Credit has contracted in the United States which is great news for our long term fiscal outlook. It means that Americans are actually slowly paying down their pre-existing debt (Or banks are writing off bad loans) and are taking out less new loans (which drives consumer spending). Since less credit is being taken out that means less money is currently being spent.
- Many states are in dire fiscal trouble; heading the list may be California, Illinois, and New York; however, many other states are not far behind them. Even with the silly bill Congress recently passed which gives the states 10 billion dollars so they can lay off fewer teachers the job losses in various state and local governments is going to be relatively large. Do not get me wrong most states and local governments desperately need to downsize their number of employees; however, this downsizing will cause more unemployment and will increase the chances for a double dip recession.
- Many local Governments and schools districts are also in dire trouble. Read #6 above.
- Our Federal Government seems paralyzed and unable to act largely due to politics. The Democratic Party has no long term solution to our economic troubles and seem afraid to undertake any actions that could improve our short term economic prospects because they are afraid of the Republicans. The Republicans are instead focused on our long term economic prospects and are less concerned about the short term economy. Basically our Government has no plan to deal with our economic conditions and the two major political parties are chiefly concerned with blaming the current economic conditions on the other political party.
I currently feel that we will have a double dip recession. I think it will occur early - mid 2011.
What do you think?
Mike Sylvester
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15 Responses to “Double Dip recession is coming”
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It’ll happen in about February. Should take about 30 days after all the businesses have hard numbers in January (and the bevy of costs associated with Obamacare) to completely kill off any possibility of growth.
It’s been an awful two years in the housing industry and the next two years will be far worse. The regulations alone have turned simple transactions into 90 day nightmares and it won’t get any better. The seller associated costs are skyrocketing due to buyers using FHA taxpayer subsidized artificially low rate loans which require expensive repairs and inspections.
It’s gonna get uglier out there kids, buckle up.
This has been brewing for 75 years. As the economy grew, paychecks grew and so did taxes at a much higher rate. As productivity improved, displaced workers found new jobs in up starts making luxury items such as cars, TV’s, entertainment, travel and more. This works if people are setting aside money for the future. The problem is they were hoodwinked by thinking paying Social Security and Medicare was the same as saving for their future. They were taught you could get something for nothing.
The movie years ago “Perfect Storm” is what we have now. We have the final realization that it takes a person 40 years to save for retirement, yet SS will exhaust its trust fund in less than 27 years and Medicare sooner. How does a person save for retirement in just 27 years, they cut back on spending. Where do they cut?
For years, 95% of all these taxes paid to SS and Medicare went to those who spent it putting it right back into the economy, but in the place of hard assets, they placed IOU’s. So our economy is based on spending, not saving. When spending slows, so does the economy.
Had we been saving 16% as did the workers in the 50’s, everyone would have been able to weather a down turn. The problem now is that with 10% unemployment (in reality closer to 20%) we simply have too much capacity for the goods we need to sustain a minimum spending economy.
Higher savings would have grown our economy slower, but look at where we are now. We would have had a much stronger economy. Our economy is based on debt and spending.
The Perfect storm: Entitlements, loaning money to those who should never should have been given a loan in order to improve the economy and $13.4 Trillion in debt. What happens with trillions in short term US Debt that needs to be refinanced in ever larger auctions? Remember the movie Trading Places? A squeeze could happen.
So what stocks do you think will be strong if any?
People need to eat and during the depression, people used their last nickle to put gas in their car.
Energy and food. You need food to live, without food you die. You need energy to heat, cook and make the economy go, without energy the country dies.
We can live without entertainment (amusement parks, theaters). We can live without resteraunts (Arby’s,Burger King, Applebee’s). We can even live without the car to a large extent since they have improved materials, they last longer. This means that Advance Auto, O’Reily and part stores should do ok.
With a national debt approaching $14 trillion, high unemployment, Social Security running negative cash flows (1st period 1957 - 1965, 2nd period 1970 - 1983) and Medicare both dependent on working wages, I see these too programs imploding.
Until the United States builds it wealth back from the brink of bankruptcy, I see hard times for a long time.
I just heard the Obmination Healthcare bill has a 3.5% transfer tax on the sale of all homes. The housing industry is hit hard, this will kill it. Does anyone know if this is true?
If you want to keep jobs in the US, you need to be the low cost producer. This means low taxes. If we want low taxes, then we need to cut spending. If we want little disposable income and be dependent on government, we need high taxes with low take home pay.
The American people are addicted to two very large government programs. Until we can just say no to them, we are doomed.
Bill “If we want little disposable income and be dependent on government, we need high taxes with low take home pay.”
That’s the Democrats plan in a nutshell.
Corn futures are at $4.30 a bushel and soybeans are headed higher. These prices are not as high as they were a year or two ago. 50% of the ethanol plants went bankrupt. The Russian fires and the Chineese plans to import more grain are fueling the increase.
Corn, Beans now all I need are a few windmills. I will be able to eat and sell energy. Hopefully enough to pay the property tax on the land.
My mom grew up on a farm during the depression. She never went hungry and her family helped a lot of people. My dad grew up in the city and work was tight. He paid the property tax on the house with a paper route and he went hungry many times. I agree with a double dip. However, the dip may not be a small dip.
Answer on William’s home sale tax question:
There is a new 3.8% tax, but only if married AGI >$250k, and after the existing $500k homeowner gain exclusion rule is applied, and even then it may not be that much… basic example at http://www.chicagotribune.com/classified/realestate/ct-mre-0815-benny-kass-20100813,0,2766275.story
Bottom line - the vast vast majority of NE Indiana household will not have to worry about the gain, as homes generally don’t appreciate $500k after improvement expenses.
But another hoop to jump through…and another reason for some sanity and serious discussion about a consumption tax (to replace the income tax)
Tim,
The costs associated for “Obama care” will filter in over several years…
They will not all hit on January 1st, 2011. In fact few hit then.
Mike
I stumbled across this article today- not saying he is right or wrong, but you may find it interesting.
http://www.dailyfinance.com/story/investing-basics/double-dip-recession-yield-curve-no/19603878/
Kevin,
That article cites its source as a “Portugese economics blog.” (No, not Portugese water dog)
The stats and indicators can predict whatever you want to see, but I think the chances of it getting better before getting WAY worse are about equal to seeing Obama’s birth certificate.
@Little Turtle -
“seeing Obama’s birth certificate”
Dude seriously.
What conspiracy websites are you tuning into ?
A statement like that only makes you look foolish and desperate.
The theory is only as good as the market can accurately judge what will happen in the long-term.
GDP growth, especially nominal growth as the theory predicts, doesn’t necessarily translate to the population feeling better w/ jobs, etc.
Bottom line, it is a fluff piece, actually saying very little we don’t know.
And at the risk of getting off topic, one of the things I like about the site, is the good reasoning and top-level discussions made; Little Turtle, your comments are just plain silly. If we want to read recycled rants, there’s plenty of large media sites out there to do so.
John Bloom,
I think some of the counter cyclical stocks will be ok like Monsanto, Archer Daniels Midland, etc.
Mike
Artificial stimulation of the economy is killing our economy in the long term. I always said that Greenspan was on the wrong track and a month ago he finally admitted that tax cuts paid for by borrowed money was bad. Is there a difference between an artificial stimulus and a tax cut paid for with borrowed money? The U.S. has had continual deficits since 1958. Every single year has been a deficit in the general budget ledger.
Every dollar borrowed today may stimulate the economy today, create another job, but it has to be paid back at some point in time. If the cost of the borrowed dollar does not create a positive investment long term, then we end up in a downward spiral.
The tax credit for buying a home took future home sales and concentrated what might have been homes sold over two years into six months. This type of stimulus robs Peter to pay Paul. It creates no demand at all it only shifts when the demand will occur. The same can be said of the latest stimulus bill for teachers. It only means that school systems with too many schools with associated teachers will be kept open until the hard choice must be made on which ones to close and which teachers to lay off.
If you do not live within your budget, you will ultimately live in squalor.
The U.S. needs to rethink what “richest country on earth” actually means. This phrase has been repeated so many times I think the vast majority believes this. We are not the richest country on earth, far from it. A more appropriate phrase would be the U.S., the deepest in debt nation on earth.
The national debt as of 8-24-2010 was $13,363,278,285,831. This is now $1,454,910,857,829 more than it was on September 30, 2009. In simple terms the year to date deficit is over $1.45 Trillion and we still have another 38 days to go to the end of the fiscal year. This size deficit at low interest rates is nearly 90% of the general revenue taxes paid. What happens if and when the people loaning money to the U.S. Treasury decide to not loan it anymore and rates go from 2% to 6%?
It may be nice that everyone has Healthcare, good roads, Social Security, Medicare, Medicaid, education, the latest Defense weapons, etc, but the fact is everyone one of these programs is paid for in part with borrowed money. Borrowed money means we as a country want these programs but are unwilling to pay for them. It is not right to borrow money to pay for the programs WE want today and give the bill to OUR CHILDREN to pay later. The problem our economy is facing is the result of 53 years of reckless spending by both republicans and democrats.
If and when we go into a double dip recession, it will be far deeper than the first dip. The first dip, people did not believe just how far it would go and did not cut spending until the last minute. This time we are starting with high unemployment, increase savings rate of those working, paying down debt with a cut back in spending.
I agree and have been saying watch for the double dip for the past 8 months to fellow colleagues. I am a Realtor and we had a great artificial bubble created by the First Time Home Buyer Tax Credit for the first part of the year. As you can see from the recent news on both new construction and existing home sales that true numbers are starting to filter in and they are ugly. Interest rates are at historic lows and the ability to get a loan isn’t as difficult as some would lead on. Wells Fargo will do a home loan on a 600 credit score, many mortgage brokers have investors that will work with a 620! The problem isn’t the lenders, its that their is absolutely no confidence in this economy and rightly so. Another study just released stated that 1/10 mortgage are currently in foreclosure. To bring this home, the next time your driving down the street start counting houses to get the visualization that every 5 houses you pass on one side, you most likely just went past a home in default. That’s just unreal and the effect that these homes will have on the overall market once they are listed and sold as a foreclosure to surrounding home values will take years to overcome.