Is the Recession Over? Daryl Montgomery August 2009 Copyright 2009, All Rights Reserved

The Depression is Over - Herbert Hoover, June 1930 U.S economic activity bottomed in March 1933 The negative effects of the Depression lasted many more years.

Where Have We Seen this Picture Before? Because of a massive real estate bubble in Japan in the 1980s, many major Japanese banks became insolvent. The government kept them running by subsidizing them and many businesses, which prevented the problem from being solved. Known as zombies. Central bank dropped rates to zero. Government engaged in one stimulus program after another to revive economy. GDP went up with stimulus. Once it was removed, GDP turned down. First there was an initial recession from 1991 to 1993.

Japan had Negative GDP in the following Quarters 1997 – Q2, Q3 (recession) 1998 – Q1, Q2 (recession) Q1, Q3 (not technically a recession) 2001 – Q2, Q3, Q4 (recession) 2003 – Q – Q2, Q4 (not technically a recession) 2008 – Q3, Q4 (recession) Q1 (-14.2% decline)

Claims That U.S. Recession is Over 87% of U.S. economists think Q3 will be the end of the recession. Economists average prediction of Q3 GDP growth is 3%, some as high as 6%. For a long time Bernanke has said recession will end by the fall. There have been a number of media articles stating recession is over. There have been media articles claiming real estate has bottomed.

How is the Economy Doing? Home sales are supposedly improving. Manufacturing improving. Exports Improving. NOT improving: Consumer spending (72% of economy) Service sector (79% of economy) Bank lending (key to future growth) Employment and income

Real Estate Deconstructed Sales have supposedly gone up 3 months in a row and prices 2 months in a row (NAR). Employment and income deteriorating (down 4.7% yr over yr). Mortgages hard to get. So whos buying? 32.2% of mortgages in the U.S. are for more than the value of the underlying property –this is where potential foreclosures come from. Estimates: only 4% of mortgages will be foreclosed. Foreclosures up 7% last month, 32% last year, despite a number of federal and state programs to prevent them and banks not foreclosing to keep them off their books.

Manufacturing ISM July report 48.9 (50 or above expansion) – 6 of 18 industries reported growth. Cash for Clunkers program stimulating auto industry (probably the worst hit) in Q3. Auto employment increased 28,000 in July! Autos added 0.2% to Q2 GDP! (And pigs can fly) Increased exports help, even if internal demand remains weak (happened in Japan in Q2). Likely to turn positive in August or September.

Exports Exports hit bottom (so far) in April and have risen for 2 months. U.S. trade deficit increased to $27 billion in June from $26 billion in May because imports rose faster. Biggest U.S. trade deficit was July 2008 at $65 billion when oil peaked. Trade deficit very dependent on price of oil. Lower the trade deficit, the higher GDP.

Bank Lending Getting Worse Banks improved earnings were the result of accounting changes (caused much better trading results). Loan portfolios deteriorated and loan loss reserves had to be increased (core business). Bankrupt, nationalized, and derivatives poster child AIG had positive earnings. Fannie Mae still lost $14.8 billion in Q2. 77 Banks have failed so far this year. 305 banks now on troubled list. 25 failed in 2008.

The GDP Numbers Cant be Trusted Prior to July 31, 2009, the BLS had 2008 U.S. GDP up by $450 billion or around 3.0%. The U.S. was in a severe recession for all of A recession is when economic output declines. GDP measures economic output. How could GDP go up during a severe recession? Revisions now have 2008 GDP up 0.4% in It should be down probably 3% to 5%. Total official GDP of $14.15 trillion could really be as low as $10 trillion.

Debt Prevents Sustainable Economic Recovery U.S. household debt (mortgages, credit cards, auto loans, etc) is $14 trillion. Corporate debt is $9 trillion. Official U.S. National Debt is $11.4 trillion. Unfunded Medicare and Social Security liability is $42 trillion (indexed for inflation). As of Feb 2009, at least $11 trillion was allocated for Credit Crisis bailouts (very little of this included in National Debt).

Conclusion Just as in Japan in the 1990s, conditions for a sustainable economic recovery dont exist in the U.S. today. Increased consumer spending is key to better U.S. GDP. Need debt level to be reduced and jobs and income increased (economists not predicting this soon). Any given quarter can have positive GDP if enough government stimulus takes place. This doesnt mean the recession is over (but the media will say it is). When stimulus is withdrawn GDP will fall back down. Continual stimulus will be paid for with more money printing – and this will be inflationary.