Now that the economy has been blown out of the water by reckless real-estate lending and a massive $800 billion stimulus plan is in the works, don’t expect things to get much better in the next few years.
The downturn that began in the fourth quarter of 2007 gathered momentum in 2008 and landed full blast in 2009, and it will continue into 2010 and beyond, said Keith Hembre, chief economist with U.S. Bancorp of Minneapolis.
Hembre’s credentials include being designated one of “the top five economic forecasters for 2008” by Business Week magazine.
Hembre delivered a bleak analysis to 125 people at a joint meeting of the Mountain Metro Association of Realtors and the Evergreen Chamber of Commerce on Feb. 10 at Hiwan Country Club in Evergreen.
Hembre told the audience to expect to see weakness for the first half of 2009. But, he said, by the second half of the year the stimulus package should bring some improvement.
Inflation and interest rates will remain low, and corporate earnings are expected to fall further, Hembre said.
The 18 percent fall in home prices nationwide wiped out $12 trillion in personal wealth and triggered a drastic downturn in consumer expectations.
“The key element is weakness in (consumer) demand,” Hembre said.
With consumer spending down, business spending is down. He said companies are being very aggressive in holding down labor costs, and that is putting downward pressure on wages.
“Labor markets remain very weak,” Hembre said, pointing to 600,000 jobs lost in January and 500,000 in February. “Profits won’t expand until the next turn in the profit cycle.
“Credit standards have tightened tremendously. But we can’t go back to what got us into this problem,” Hembre said.
Expect earnings to be challenged in the coming quarters and a “pretty bleak” employment picture for a few years, reaching 8 percent unemployment by the end of 2009.
“Long term, we believe in the growth potential of the economy, but it’s a much choppier path to get there for five to six years.”
Hembre expects government policy actions to create more long-term instability. The trends that produced 25 years of uninterrupted economic growth since 1982 — deregulation, rising assets, liberal credit, NAFTA trade growth and productivity of labor — are no longer driving forces, the economist said.
America can’t support the projected huge budget deficits (2009 to 2013) forever, Hembre said.
During the question-and-answer period, someone asked what Hembre would do if he were a business owner right now.
“If you face declining profits, you have to reduce costs,” he said.
He suggested that in the future there will probably be something like the Glass-Steagall Act to impose stricter rules on what banks can do.
In response to a question on where to put IRA money, Hembre pointed toward fixed-income assets, like corporate bonds and government-backed mortgage bonds.
“What has to happen in the intermediate time frame is, the rest of the world has to increase its demands. Exports have to go up.”
He said America still has a competitive edge compared to the rest of the world in terms of innovation, machines and intellectual property.
Hembre maintained that the overinvestment in real estate in 2007 is at the bottom of the economic slide, followed by “housing prices rolling over,” “overleveraging in the financial system,” the fall of Bear Stearns and Lehman Brothers, and a write-down in securities in general.
Contact Vicky Gits at Vicky@evergreenco.com.