Has the Economic Crisis Bottomed Out?

By John Sparks

How long will the economic crisis last?  Associate Editor of Barron’s, Michael Santoli, shared his observations with the Marist Poll’s John Sparks.

Here’s the transcript of their discussion:

Mike Santoli

John Sparks
Michael, we conducted a national survey, and we asked Americans how long they think the current economic crisis will last.  I’m curious about your thoughts on that, as well as how does one define that point?

Michael Santoli
Well, your latter question actually I think is very relevant.  If you consider the economic crisis to be the recession, in other words, a period when the economy is shrinking, I think we’re looking at least another several months.  Really, the optimistic forecast that the economy might get back into growth mode in the very latter part of 2009, maybe into 2010.  If the economic crisis is defined as a period of weak employment when we lose jobs month in and month out, that probably is going to last a little bit longer. Employment is a lagging indicator.  It isn’t going to come back until after the sort of statistical measure of economic growth returns.  But in terms of the crisis that began last year with the financial institutions at the risk of failure and the sort of banking systems ceasing to function and all that, I actually think we’re through the real acute phase of that crisis.  We don’t at the moment have a concern about big institutions falling into chaos the way Lehman Brothers and AIG did, so that real intense period of the crisis might already be past.

John Sparks
Now you mentioned the last few months of 2008.  I recall there was a lot of discussion, especially during the last days of the Bush administration, about when is a recession a recession.  How would you define it?

Michael Santoli
I would define it… I think the standard definition as opposed to the sort of technical statistical definition is a prolonged period when economic output and employment are in decline, and we’ve had that obviously for some time.  A lot of folks want to say, “Well it has to be at least two consecutive quarters of negative gross domestic product numbers.”  I don’t know that that one is sort of sufficiently broad or applicable to every situation, so really an extended period when business activity and retail sales and employment are weak or shrinking.

John Sparks
Now we also asked what people consider to be the most important concern for the economy, and we asked them about unemployment, the stock market, mortgage crisis, interest rates, inflation.  I’m just curious, of those items, what would you think would be their most important concern?

Michael Santoli
Well, the most concern I think for the average household should be the employment situation because it is going to continue to weaken.  It’s obviously… Really it’s a black and white issue for the most part.  If you have a job, you’re much more likely to be okay, be able to kind of cover your expenses than not. It sounds trite, but that’s’ really the defining definition of whether you’re in economic distress or not.  But more broadly, I actually think that the excess level of debt at the household level, at the corporate level, the government level is really what’s weighing all of us down.  So in some sense, it’s the credit crisis which reflects the excess of debt on everyone’s books that is the longer-term concern, and I think it’s the thing that’s going to keep the economy from really speeding up even as it recovers the way we’re familiar with. The recovery is more likely to be kind of muted, and consumers are likely to remain on the defensive.

John Sparks
I want to talk about the stock market for just a moment.  Late last week, the market had a pretty good couple of days.  Do you think that things will get worse before they get better, or do you think we’re beginning to see a turnaround that will continue?

Michael Santoli
Well the stock market’s only shown the tentative signs that maybe it’s in the process of bottoming.  As you mentioned, we had actually four strong weeks from the early March lows in the Dow.  We’re up more than 20% in four weeks, which is obviously a tremendous amount percentage-wise.  Not many people were able to catch it because it happened too fast, and there’s some tentative indications that maybe that low would be the ultimate low, but that doesn’t mean that we’re up, up, and away with the stock market because typically it kind of backs off, maybe even returns to those levels. The bottoming process is usually prolonged and kind of painful.  But with a market down 50% from its peak of 2007, it’s gone an awful long way into sort of building in a lot of the negatives that we all know about, so there is a decent chance that we’ve seen the bottom, but no guarantee.

John Sparks
Now we ask Americans to look at their own personal family finances and tell us if they expected in this next year, 2009, if they expected their personal family financial situation to get better, worse, or remain about the same.  Interestingly enough about 50% said about the same, the rest a little bit of an edge for those that said they expected it to get better. I’m just curious.  Does that seem to jive with what you think will happen?

Michael Santoli
It’s tough to say, although that’s not — it’s sort of interesting that that’s the breakdown, and I think that 50% that figures it’s going to stay the same, it sort of reflects that a tremendous percentage of people in this country have a very steady job and/or kind of retirement income and a very high percentage of homes in this country are actually paid off.  So it’s… even though you hear about the foreclosures and people strapped, it’s not necessarily the majority.  It’s just sort of a large minority.  I do think it’s plausible that things get better for a fair portion of people out there because home prices have come down so much that I do think that even if they just sort of flatten out after a few months here, it will be kind of considered a positive in people’s minds. The other thing to keep in mind is interest rates are so low that a lot of people are going to be able to improve their financial position by either refinancing a mortgage or just sort of swapping to sort of lower cost debt, and so I do think there’s some indicators for the luckier household that it could get better. The worst part, though, is going to be the housing market remains on the defensive. There are too many homes out there. It’s most people’s chief asset, if they have an actual hard asset, and that’s something that we’ve not finished the reckoning process with regard to home prices.

John Sparks
Now we asked people if they felt like things were going in the right direction right now or were things going in the wrong direction as far as ways to address the economic crisis, and not surprisingly 80% of the Democrats said, “We’re headed in the right direction.”  63% of the Republicans said, “No, we’re headed in the wrong direction,” and that brings me to the next question.  A lot, especially when we speak of the stock market, seems to fluctuate so much on emotion.  We all recall FDR saying, “The only thing we have to fear is fear itself.” I wanted to ask you:  Do you think our current president, do you think he can inspire self-confidence in the American public and in the market, and if not, is there anyone who can pull this off?

Michael Santoli
Well, I think he can in a sense that he can kind of deliver the proper messages, which is that this mix of we’re in serious trouble, but we see our way out of it.  It’s definitely plausible that he can get that across, and if he can’t, probably it’d be hard for anybody to do that.  But I do think that what we have to get beyond is this period of kind of improvised responses, and it’s by necessity that the Treasury Department, the Federal Reserve are basically kind of building new tools to try to attack this issue. I do think a big part of what a president has to do is not so much come up with the detailed solution, so to speak, but to kind of send the message and gestures that we’re on the case, things will return, just because the cycle always turns, and kind of to be there when it does improve with sort of a longer-term strategy that’s not just crisis management.  So it’s possible.  I understand why there’s frustration out there, and I do think that we’re in this period obviously of kind of recrimination and sort of who’s to blame for this mess.  A lot of that sentiment out there is understandable, but I think it’s a phase that we have to really get through.

John Sparks
Michael, finally the world has shrunk.  We certainly live in a global economy; and more than ever, there’s an interdependence on the economy of the United States with the markets in Asia, Europe, and the rest of the world.  So just how much do these foreign markets affect our economy, and are there some things that affect us adversely that are beyond our control?

Michael Santoli
Well there’s no doubt. I mean the one huge area of interplay between us and the rest of the world is many parts of the rest of the world lend us tremendous amount of money, meaning our governments and they subsidize our consumption.  Trillions of dollars of our government debt are owned by the Japanese, Chinese, Middle Eastern states.   It’s not necessarily a great position to be in.  For the time being, it’s in everybody’s interest to make sure they keep buying this up because they need to sell to us so… But it’s a tremendous risk down the road that that dynamic will break down, and that would mean higher interest rates and all kinds of bad things for us, like a dollar that goes down in value.  But in terms of other areas that are sort of a net positive, what we found during this crisis was that I think the United States consumption is, it was reminded to everybody in the rest of the world who export to us just how important our domestic economy is to sop up their goods, and I do think that that means that they will continue to do what’s necessary that we can continue to buy their stuff, which also helps keep inflation down here. That’s a kind of a… That’s kind of the positive part of the dynamic. For the time being, we’ve gotten a big tax break in the form of lower oil prices. They’ve been climbing back up a little bit.  They probably will accelerate if the world starts to recover relatively quickly before the United States does, and there’s some signs by the way that China and the emerging markets are already recovering. That could be a risk, too, because obviously geopolitics can also add tens of dollars to a barrel of oil, and we have to sort of be careful of that.  I think the biggest risk, plausible risk near-term, is that all these countries try to get a position of exporting their way out of this downturn, and that they start putting up trade barriers and all that and kind of spook the market.   That really did deepen the depression. The G-20 recently at the meeting kind of vowed that they wouldn’t do that, but that remains a risk in my mind.

John Sparks
Michael, I thank you for your time.  Is there anything that you’d like to add that you think might be pertinent for some of our readers that we haven’t talked about?

Michael Santoli
I think we pretty much hit all of it.  I do think we should sort of keep in mind that a lot of sort of fuel has been thrown at this economy in the way of the stimulus and low interest rates, almost free interest rates to banks, and that eventually will kick in.  We just have not seen that point at which it’s really hit the economy yet, so we have to be alert for the likelihood that we will in fact start pulling out of this thing before too long.

John Sparks
Michael, I really appreciate your time.  Thank you for spending the time with us.

Michael Santoli

Thanks very much. Appreciate it.

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