Will 2009 bring a U.S. economic recovery?

Yes, possibly starting around midyear,
assuming no more unpleasant surprises are lurking.
The first half, though, will be tough,
with the economy contracting 4% in the first quarter,
following a 5% decline in the last quarter of 2008.
Still, here are four reasons for optimism:
Low interest rates. The prime is at 3.25%
and will stay there for a while. That makes it cheaper
for qualified borrowers to buy or refinance a home,
or to take out a loan for a car or college tuition.
And the Federal Reserve’s plan to buy up more debt
starting in Feb. will help keep interest rates down.
Low prices. Cheap oil won’t last forever,
but it will last several months, as will modest prices
for food and other commodities, goods and services.
Inflation will be in the 1%-2% range for 2009,
stretching paychecks for those who still have jobs.
Federal spending. President-elect Obama
and Congress plan a stimulus of over $800 billion
in tax cuts and spending as early as this month.
If the money can be put to work quickly...a big if...it will create a few million jobs.
A new sense of public confidence in Washington. About 70% of Americans
say they are optimistic that the Obama administration will be able to spur growth.
Economists say confidence is a key element, especially as it relates to consumers.
That’s a big plus if Obama can deliver quickly enough to keep the momentum going.
But there are plenty of worrisome factors weighing down the economy:
Housing. A million homes are in foreclosure now and a million more will be
by year-end. Unsold houses are piling up, depressing prices. By the close of 2009,
25% of mortgages will be underwater, meaning the loan exceeds the house’s value.
Tight credit. Qualifying for a loan is very hard right now
as banks worry about the job security of borrowers.
As a result, banks are hoarding far too much cash.
Declining exports. The global recession cuts demand
for U.S. goods. Exports will shrink by 0.5% in 2009.
Auto industry blues. Uncertainty about Detroit’s future
is a big cloud darkening the entire U.S. economy.
Gas and oil production. As prices plummet, companies
have less incentive to invest. That’ll mean shortages
when the global economy improves and demand rises.
Deficits. Few are worrying about the federal debt now,
but eventually it’ll jack up interest rates. (More on p. 2.)
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Though we think the recovery will start in the second half of the year...
We’ll be watching four signposts for clues over the next several months.
Over time, they’ve proved good indicators that a recession is beginning to end:
Stocks. The markets are a leading indicator. Over the past 70 years,
they’ve started rising four months, on average, before GDP turned positive.
Jobless claims. First-time unemployment applications will be a better clue
on timing than job losses, which tend to lag. Claims are running at over 550,000
per week now. When they come down to 400,000 or so, that’ll be very encouraging.
Bond rates. The gap between interest rates on low-grade corporate bonds
and Treasuries has soared to around 17 percentage points. Normally, it is closer
to five points. Until it narrows, businesses with less than stellar credit records
will be virtually shut out of the bond market and have to struggle to get cash.
Housing starts. Once the declines level off, look for home prices to stabilize.
That’ll be the beginning of the end of housing’s negative contribution to GDP growth.
Metal prices will fall further before stabilizing and gaining slightly in 2010.
Meager demand by manufacturers and builders will prevent any significant recovery
from November’s losses of 50% or more when economic unease spread worldwide.
Look for aluminum to decline by more than 10%, from 90¢ to 80¢ a pound,
by the end of 2009. Copper will shed over 15%, slumping from $2.10 to $1.75.
Tin will fall about 5%, to $5.50 from $5.85. No improvement, either, for nickel,
which will drop about 15% in 2009, going from $5.05 to $4.30. It fell 60% in the fall.
Slow global growth will take a big toll on the 240,000 U.S. small exporters.
Their foreign orders are drying up more quickly than those of bigger firms,
and they have less clout than multinationals in fending off resurgent protectionism.
Firms dealing in high-tech and telecom goods are among the most vulnerable.
Smalls are also being particularly hard hit by the sharp drop-off in trade financing,
needed for insurance against nonpayment by foreign customers or political risk.
Smalls with IRS problems will get a break...or at least a quicker resolution.
A pilot program offering a fast-track settlement procedure will be extended two years.
It’s now operating in Chicago, Houston, St. Paul, Minn., Philadelphia, central N.J.
and three areas in Calif. Firms with assets under $10 million are eligible.
You won’t know there’s a recession under way if you watch the Super Bowl.
Advertisers will spend even more this year than last. But a big change
in the mix this year: The Detroit Three will hide, hard-pressed to spend $3 million
for a 30-second ad. Last year, GM was tops among all automakers. No letup
by brewers, though. Budweiser will again get more airtime than any other product.
One consolation in this economy: Some medical costs will be cheaper.
Orthodontic work is on sale, with many dentists offering big discounts
to make up for a 20% decline in business. Other discretionary medical services,
and anything not covered by insurance, are also widely on sale to attract customers.
Cosmetic surgery is 10% to 25% cheaper. Sales, too, on LASIK eye surgery.
Along with lower prices, providers are offering easy credit and low interest.
Many also offer package deals: A Botox shot along with a nose job, for example.