In my last column, or as some readers are calling it, my formalized blog, Road Warrior travels took me to the financial epicenter, New York. After a visit to lower Manhattan, Wall Street and Ground Zero, the educational and speaking component was the 2009 Northeast Farm Credit Conference.
Mark Zandi, Chief Economist at Moody’s Economy, Inc., a nationally and internationally respected economist was on the program with me. He mirrored my comments in an earlier session that the economy would slog along in early 2010 and 2011 after the effects of the stimulus packages diminish. He stated some basic reasons.
He is uncomfortable with the economy early next year because of the job market. Unemployment has a high probability of exceeding 10%, but more importantly with discouraged workers and cut backs in hours, the rate may be near 17%. This reduces consumer confidence and investment ambitions. If small businesses and businesses in general do not improve hiring on a sustained basis, then the economy will be in difficulty.
Next, home foreclosures are is still increasing. Two to four million homeowners are 30-90 days delinquent or “upside down” on their mortgage, which means they owe more than the property is worth. This figure is based upon 53 million mortgages nationwide, which is too high of a percentage on a major part of the economy. Zandi stated that housing prices would face another downturn in 2010.
Another variable in the recovery is commercial real estate. While housing prices are down 30%, commercial real estate has deflated 35%. Commercial real estate was later to begin its decline, but the decline has been much more abrupt. This could result in as many as 400 small bank failures nationwide over the next few years.
In summary, while the government stimulus – including Cash for Clunkers, tax credits for first time homebuyers and assistance to state governments – has resulted in 3-4% growth in GDP, the budget stimulus will fade next year resulting in a drag on the economy. As an economist I have similar thoughts. It is scary to have two economists in agreement on principles!
From my hotel room I could see a full moon over Manhattan on a cold fall evening. What a picture postcard with the Statue of Liberty in the distance! However, lost in this picture are the Twin Towers and people lost on that terrible day. May we never forget. Thank you to those people who are defending what this country was founded upon
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].