Not Great, But Better Than ‘08

09/26/2011 10:37 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

If we’re not in a recession, we’re almost there, but this one’s shaping up as a lesser calamity, writes senior editor Igor Greenwald.

The Eskimos may not have that many words for snow, but we ought to have more than one for an economic downturn, if we’re going to have them with such depressing regularity.

Which is likely the case, based on the history of financial avalanches caused by a massive overhang of debt.

Otherwise, we’ll be stuck with experts offering meaningless odds of a “recession,” when in all probability one has already begun.

Which recession do they have in mind? The one the stock market has been telegraphing sporadically since May and nonstop since August? Or the one that many Americans will tell you still hasn’t ended after three years?

One thing’s for sure: the next one is likely to be as different from the Great Recession of 2008 and 2009 as two downturns can be. So it would be especially helpful if all the dismal scientists and prescient investors stopped laying odds, and started laying out the downside in some detail.

At the very least, that might get us out of a binary guessing rut, setting fear of a 2008 rerun, against false hope that near-term global growth prospects have not been already irretrievably compromised.

It’s hard to see how the dramatic global slowdown of the past month, evident not just in Europe but also in the Americas and Asia, doesn’t herald the early stages of a recession. But while it’s painful to suffer a relapse even before recovering the losses from the last beatdown, at least the US will be falling off a very low bar stool.

The 8 million jobs axed in 2008 and 2009 and not yet replaced are 8 million pink slips that won’t be devastating someone all over again.

The 1.8 million jobs regained are likely quite different from those they replaced, though some of these undoubtedly will be lost. So will some jobs that survived the last purge, though again the layoffs shouldn’t approach anything like the scale of three years ago.

US households also will be starting this recession better prepared than they were for the last one, though of course that’s not saying much. The personal savings rate is up from 2.3% on the doorstep of the last recession to 5% now.

Inflation-adjusted income has declined, but not as fast as debt. The debt-service ratio is down from 14% of disposable personal income in late 2007 to 11% these days.

And while the net worth of US households is down by some $6 trillion over that span, the bulk of that is in paper losses on real estate. A lot of that pain has been passed on to the banks, which are still working through millions of foreclosures. But mortgage delinquencies have recently begun to decline in many parts of the country, a necessary first step to a recovery.

Certainly, the bulk of the price declines seems to be behind us. Rising rents, low interest rates, and the pent-up demand for housing from people who are undoubtedly sick of their extended families argue against much lower prices.

Meanwhile, commodities that soared through the first nine months of the last recession are now plunging, holding out the prospect of another break for a consumer who can use all the breaks and then some. In 2008, the US was at the center of the crisis, while the emerging markets driving the commodity demand continued to grow, for a while.

Now Europe is Ground Zero, the US more of an accidental casualty, and the emerging markets much more in tune with their developed trading partners. Brent crude is hardly cheap at $100 a barrel, but it’s certainly an improvement on $145 in the summer of 2008.

Meanwhile, the corporate sector is in much better shape than three years ago, having rebuilt its profits to a near-record while paring costs, racking up foreign sales, and refinancing on the cheap. The till is overflowing with cash.

True, earnings estimates and forecasts are coming down, and the global slowdown could still hurt the multinationals quite badly. But they’re no longer scrambling for short-term credit, and are much leaner and meaner than in 2007.

Investors might still be disappointed, but at least corporations won’t be the destabilizing economic force they were last time.

There are some disturbing similarities between then and now, to be sure. We have another banking crisis, this one in Europe over sovereign debt. Distrust in institutions is, if anything, even higher now, and with good reason, with the German financial establishment and our Congress insisting on austerity for demand-starved economies for ideological reasons.

Still, there are good reasons to hope that the next recession will be milder than the last one, which was the longest and the harshest since World War II.

That’s not much of a silver lining. But it will have to do. Besides, silver’s not the prize it used to be.

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