- Think the economy is recovering? Think again.
Forget the noise and statistics thrown around by the politicos and pundits. We are not at the end of this recession — we are in the middle of it. This will not be a V-shaped recession and recovery, folks. It is a U-shaped one at best, meaning we have a while to go before things truly pick up. But, more than likely, we are dealing with a W-shaped recession, and we are near the end of the second leg … and then down we go. And even if the economy stays flat, the stock market will almost surely head back down when the Street realizes what a jobless recovery actually looks like.
So, while the statistics may point to an economic recovery this quarter or next, the real world will be feeling recession pains throughout 2010. Still not convinced? Here are the 10 reasons the economy will flat line or decline in 2010.
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#1 Dramatic Loss of Wealth
People not only feel poorer, they are poorer. Personal wealth will continue to decline in 2010, as home prices fall even further, fueled by a wave of 7 million homes that will go into foreclosure in the next 12-18 months. And foreclosure rates will remain above historical norms well beyond that.
More foreclosures mean more downward price pressure in the housing market. And homeowners will experience a commensurate loss of wealth as the value of their homes decline. And this is on top of all the money that had previously been lost in the stock market — as much as 40% of accumulated consumer wealth.
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#2 The Jobless Recovery
The pundits on CNBC get all giggly when we lose “only” 550,000 jobs — a true sign of the times. Uber analyst Meredith Whitney, one of the few people on Wall Street who has been worth listening to during the past three years, is forecasting 13% unemployment in 2010 or 2011.
Officially, unemployment currently stands at 9.8%. But if you add in part-time workers wanting more work and the people who are so discouraged they have stopped looking, the number is a shocking 20%.
Unemployment puts pressure on wages (which are stagnant) and hours worked (which are decreasing). This all adds up to falling national income, which means …
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#3 Consumers are Afraid to Spend
A fear of a loss of income will continue to squelch consumer spending. Most people I know are fearful about their futures, i.e., losing their jobs or seeing a cut in commissions, profits or wages. This means they will hang on to their pennies in 2010.
Bottom line: Consumers drive 70% of GDP, and a meaningful recovery will not happen without their dollars.
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#4 Changing Consumer Attitudes
Not only are consumers not spending, their actual attitudes toward spending have changed. Even for the six people on the block who are flush with cash, frugality is the new chic. My neighbors, high-end Saab and Volkswagen types, just bought a Kia Sportage for their daughter (nice car, by the way).
This change in spending habits will not be a passing fad. Just ask Grandma or a neighbor who remembers the Great Depression how their parents changed after living though years of a terrible economy. Changes in spending became permanent and re-shaped the economy until the boom following World War II.
Frugal will be the norm in 2010 and beyond.
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#5 The Credit Crunch Will Continue
By year-end 2009, we will see a more than $4 trillion pullback in credit lines. And we are a country that runs on credit. In fact, the entire growth in consumer spending from 1997 to 2008 was paid for with home equity lines and credit cards.
Credit standards are already impossibly high. My credit lines literally shrink every month because I do not use them. But what if I needed them? And I almost couldn’t get a lease for a new car even though I have never missed a bill payment. The majority of people cannot borrow money and, therefore, cannot spend. This will not change in 2010.
Discover 5 Ways to Survive the Rest of the Year.
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#6 Excess Capacity
Excess capacity is everywhere — we have more than enough people, factories, stores and so on to meet current demand.
Want to buy an indoor mall? You can get one in North Myrtle Beach for $3.3 million — less than the previous value of many homes in that area.
The Chinese continue to build factories the world does not need; factory utilization in the United States is at an all-time low in many industries; home building is at less than one-third peak levels … I think you get the picture.
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#7 Businesses Aren’t Spending
Businesses do not see a turnaround in 2010. Even with public figures talking up the economy (and who can blame them, it’s practically in their job description) businesses are not listening. If consumers aren’t spending, why should businesses?
As the consumer continues to struggle, we will see businesses rein in spending further and push back hiring plans throughout next year.
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#8 Uncle Sam Can’t Bail Us Out
In the past, the government has increased spending and cut taxes to spur spending during times of economic crisis. However, Uncle Sam is now in so much debt that this is no longer a serious option. And it looks like we are going to spend another $900 billion-plus on health care reform over 10 years (a lot of money, sure, but about a third less than what Wall Street will spend on bonuses).
Simply put, the government lacks the tools necessary to significantly increase consumer or business spending in 2010.
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#9 The Fed Can’t Do It Either
Historically, the Fed has lowered interest rates to spur spending and investment. Well, the Fed has already cut interest rates to banks down to essentially zero. The media are screaming about potential inflation due to the trillion dollars the Fed put into the system, but that trillion has simply replaced the trillion written down by the banks, which have another trillion and a half in writedowns to go.
What’s more, the banks are hoarding cash to rebuild broken balance sheets rather than lending it to people. This will continue in 2010 and beyond.
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#10 Take a Good Look Around
Do you see a rebound?
The Mall of America would be a great practice field for the Minnesota Vikings, fall and winter clothes are already 40% off at Macy’s (M), and the Palms in Vegas is mailing me coupons.
Recently, I went out to eat with some friends: One owns a construction business that has come to a standstill; two are media types out of work; and one is the owner of a small manufacturing company, who is laying people off as fast as she can and is now worried about her own survival. And I’m sure you’ve heard similar tales of woes from your family, friends and neighbors.
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What Should You Do?
For starters, ignore the noise. There will be a statistical bounce in economic data, including GDP data for Q3 and Q4, and perhaps seasonally adjusted employment data for November and December. Then we will witness the economy flat line or leg down in 2010. Corporate profits will be lower than forecast and, with that, so goes the stock market. And it may happen sooner than you think. (Check out my 10 Reasons the Market Could Crash in October.)
Don’t let your portfolio get wiped out a second time. Instead, prepare yourself for this reality and start thinking about positioning yourself on the short side in 2010.
