Bowed but Not Broken 

10/27/2008 11:30 am EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says a recession will last well into next year, but the economy won’t go over the cliff.

Expect joblessness to hit 7.5% in 2009, as demand shrinks and firms contract.

Managers won’t start hiring again until the end of next year, at the earliest. Only then will consumer spending rebound, restarting a “virtuous” cycle: workers spend money, create demand for goods and services, and trigger more hiring.

Recession will be with us well into 2009. Nothing like the Great Depression, it’s true—no 25% unemployment and years of negative growth.

The economic pain will be spread unevenly, with some sectors reeling and others nearly unharmed. An especially tough slog is likely for industries that were struggling before the meltdown: autos, housing, retail, financial services, just for starters.

Consumers’ easy access to credit is over. With borrowing curbed, spending will be flat at best. First to go: luxuries—travel, spas, and pricier dining; entertainment and leisure—golf, cable TV, movies. Shoppers will buy less of nearly everything. And when it comes to holiday shopping this season—a dismal year for retailers. Plus the lousy Christmas will lead to even more-miserable sales in the new year.

Still, there’ll be pockets of strength. The economy won’t be all doom and gloom. Watch for profits from health care businesses, exporters, sellers and producers of food. Ditto for data providers, accountants, and lawyers hired for the federal rescue plan. Defense and aerospace companies should also weather the economic storm well.

No increase in business spending until 2010, when the credit crunch eases: few equipment purchases and only essential repairs. Companies will stockpile cash for emergencies, since loans will be hard to get. That’ll hinder the technology sector, as will fewer orders from Wall Street, which faces its biggest restructuring in 70 years.               

And another year of suffering for housing: more builders and lenders going broke. Fewer sales of appliances, carpeting, aluminum siding, landscaping, etc. Home prices will continue to slip and foreclosures to rise, despite rescue efforts. The new president and Congress may take another run at stimulating the economy, but the rapidly soaring deficit will make finding the money very difficult indeed.

Blunting the recession’s blow: lower oil, gas, and other commodity prices. Oil’s [more than] 50% drop since July is better than a tax rebate, and food prices are more stable.

Tight credit conditions will limit all cross-border mergers and acquisitions. But with many US companies starved for cash, the price they are willing to accept is much lower. The same holds for corporate assets, such as brands and patents.

Financial institutions will remain major targets, as will the Detroit auto industry and other big manufacturers. As long as the US doesn’t succumb to protectionism, it will continue to lure capital from Europe, China, the Mideast, and Latin America.

The dynamism and heft of the US economy will be tested but not defeated.

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