USA

Five Reasons the US Economic Recovery May Fizzle in 2010

Posted by David

December 25, 2009

The performance of the US stock markets since the March lows this year has given many investors the false hope that the economic recovery has already begun and that things will return to normal soon. The benchmark S&P 500 is up about 28% YTD. However while the credit markets have loosened and US stocks have headed higher, the real economy is still struggling. As a result, the US economy may face further headwinds next year which will derail the so-called jobless recovery. Some of the five reasons that the US economic recovery may fizzle next year are discussed below.

1.Unemployment Rate: The unemployment rate in November was 10%. Though this figure was slightly down than the previous month it is still high. Officially about 15.4 million Americans are unemployed. The real unemployment rate(U6) is much higher. According to some estimates, it is over 16%.

The US unemployment rate is higher than other OECD countries such as Canada, Germany, Japan, Italy, the UK, etc.

2. Consumer Credit: In October consumer credit decreased at an annual rate of 1 3/4 percent. The total outstanding consumer debt is nearly $2.5 Trillions. This figure does not include secured loans such as mortgages. From a historical perspective this amount is large and the ratio of household debt to disposable income is high as well. Any further deterioration in unemployment levels or a fall in household income will accelerate the growth of consumer debt.

3. State Tax Revenues are falling: According to a report by the Rockefeller Institute of Government, 44 states reported a decline in tax revenues as of September this year. Many of the real estate bubble states like Arizona, California, Florida have announced significant reductions in public services and have raised taxes or a variety of fees for government services. As property tax, sales tax and income tax revenues have fallen other states have also announced similar measures.

4. Small Business and Personal bankruptcy levels are high. According to the latest data “Individual bankruptcies are up by 33% to 373,308 from 280,787 a year earlier, while business filings increased 32% to 15,177 from 11,504.” As small businesses are the growth engine for job creation in this country, it is unlikely that that unemployment rate would decrease significantly until small businesses are able to stabilize and grow.

5. Excess inventory: Despite the decline in building of new homes and commercial buildings, there is an excess of inventory from residential homes to strip malls to commercial office buildings to golf courses nationwide. As these buildings were mostly built with borrowed cheap money during the pre-credit crisis years, most of the banks that have these loans on their books may have to write them down next year.This will increase the number of bank failures leading to further job losses and other related effects to the economy.

With many economists calling for a “jobless recovery” next year we may very well see a recovery only for Wall Street and not on Main Street. It is about time that the current administration enacts sound policies that encourage the growth of small businesses by reducing the regulatory and tax burden on them.