Diane Swonk – Economy Darkest Before the Dawn
CHICAGO, February 12, 2008 — "The economy is in bad shape, regardless of whether or not we actually see the requisite of two consecutive quarters of negative growth in the data to 'officially' declare it a recession. We probably won't know if we are currently experiencing an actual recession until benchmark revisions to the GDP data for the fourth and first quarters are released in July, which will be too late to matter," says Diane Swonk, chief economist of Mesirow Financial, in her February issue of Themes on the Economy.
In her February newsletter, Swonk takes a closer look at damages to consumer balance sheets, whether or not actions by the Fed and Congress can fix any of those problems, and gives her outlook for consumer spending and the housing market, including:
- Real disposable income growth has trended down in response to higher inflation—largely food and energy and a slowdown in employment.
- Household net worth has hit a plateau and will likely retrench in the near term as falling home values and recent stock market losses make their way through 401(k) plans onto consumer balance sheets.
- Debt burdens rose to unsustainable highs as adjustable rate mortgages began to reset at higher rates, and consumers shifted to more expensive credit card debt to keep their spending going.
- Conditions are likely to get worse for consumer balance sheets before they get better, given subprime foreclosures in the pipeline and downward pressure on income growth in the near term.
- Consumer spending is expected to come to a virtual standstill, and could even dip into negative territory in the first quarter, and at least a percent higher in the second half of the year.
- Short-term interest rates have plummeted in response to recent Fed easing, which has lowered the reset rate for the remaining pool of ARMs. Moreover, the 30-year fixed mortgage rate has dipped to its lowest level in four-years, which has reopened the window on mortgage restructuring.
- Fiscal stimulus plan. Some $168 billion in rebate checks, credits for children, and accelerated depreciation for businesses on new equipment purchases should be in the mail by May. Discounters are expected to do particularly well as those who earn the least are more likely to spend their checks.
- Housing is likely to hit some sort of a bottom in the second half of the year. Losses are likely to cumulate, even as the drag that the housing market places on overall growth dissipates.
"Everything from lower short-term interest rates to fiscal stimulus will be working in favor of consumer spending by spring. An abating of the head winds associated with housing will also help alleviate the downward pressure on growth in the second half of the year. Some sort of a pick up in growth is virtually guaranteed," says Swonk. "These are neither the best nor the worst of times. They are, however, the worst of times for this cycle, and have clearly left their scars, regardless if the economy 'officially' slips into recession or not. The first quarter has been particularly painful. The good news is that we are close to a new dawn, and are all but assured a better second half."
The February issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com.
Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, we are an independent employee-owned firm with offices across the country and in the United Kingdom. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit our Web site at www.mesirowfinancial.com.
For more information, contact: Diane Swonk, Mesirow Financial, 312-595-7122, or Olga Camargo, Mesirow Financial, 312-595-7128.
The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc., © 2007, Mesirow Financial Holdings, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s).
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