issue: January 2009 APPLIANCE Magazine
Forecast: North America
2009: Hope for Recovery
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by Diane Ritchey, News Editor
It's the worst U.S. recession in a lifetime, complete with a national housing crisis, failing banks, rising unemployment, falling stock prices, and disappearing 401K funds. 2009 should bring us the bottoming out of the recession, but also ushers in cautious hope for economic recovery.
The year 2008 is going to be one for the history books, as the United States descended into a recession and many major global economies experienced their own economic problems. Many Americans lost their jobs, their homes, their 401K accounts, and their economic security.
The recession started earlier than many thought. On Dec. 1, 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) identified December 2007 as the end of the previous economic expansion and the beginning of the current economic recession. That means that the previous expansion was a little more than six years long and that the U.S. had been in the current recession for more than a year. Even though the U.S. had not yet recorded two consecutive quarters of declining activity—the traditional definition of recession—the downturn in income and employment had been significant enough to qualify as a recession, NBER said.
Payroll employment growth was crucial to identifying the transition from expansion to recession. Employment peaked in December 2007 and declined every month in 2008. The cumulative employment decline through October came to nearly 1.2 million jobs, and the monthly pattern of decline generally worsened as the year progressed.
As of press time, most economic reports said that the U.S. recession was deepening. Rapidly rising claims for unemployment compensation pointed toward further large losses of payroll employment in November and December, and the unemployment rate was expected to rise from the 6.5% level reported for October 2008.
With respect to overall economic output in the U.S., the 3Q decline in real GDP was revised to -0.5%. It was expected that GDP would contract at nearly a 5% annual rate in 4Q 2008, the deepest decline since 1Q 1982. The 2Q GDP was 2.8%.
Most economists also agreed that the trough of the current recession would occur around the middle of 2009, assuming help from the Federal Reserve and a large fiscal stimulus package early this year. Yet, according to NBER, “There is a high probability that this recession will turn out to be the longest of the postwar period, surpassing the 16-month recession in 1973 to 1975.”
What Will it Take to Fix It?
Most economists point to the credit crisis and the housing industry’s problems as the reason the recession took place. The credit crisis first erupted in August 2007 as defaults began rising on U.S. subprime housing loans and led to massive losses for banks and financial firms, prompting a tightening of credit. Losses on subprime and related credit instruments cost the global financial system some $968 billion, including $664 billion in the United States. Businesses couldn’t expand when credit was virtually cut off. Problems worsened in February 2008 as the Wall Street bank Bear Stearns went into a free-fall and was sold to JP Morgan Chase.
But the crisis intensified dramatically starting in September, when the U.S. government was forced to take over mortgage companies Fannie Mae and Freddie Mac to avoid dissolution of those companies. This was followed by the collapse of Lehman Brothers, another Wall Street giant. With the financial system teetering on the verge of collapse, the U.S. Congress was spurred in October to steady the system with the passage of a $700 billion package stimulus package.
A financial storm spread around the globe, governments implemented stimulus plans, and most central banks cut rates. The U.S. Federal Reserve dropped its base rate to a historic low of 1.0%.
But the credit problems bled into the rest of the economy, hitting retailers and manufacturers, including appliance companies, and pushing the unsteady U.S. auto industry to the brink of collapse. As of press time, the three major auto companies were asking Congress for a bailout to avoid bankruptcy.
What will it take for the U.S. and global economies to recover? Nariman Behravesh, chief economist at IHS Global Insight, said that recovery is “complicated because the financial system is globally interconnected and the regional motors of growth are no longer working.”
In early December, the Organisation for Economic Co-operation and Development (OECD) said that the U.S. faces “deep problems,” including “sharp downside risks” to growth. OECD said that “the credit squeeze has been spreading to other forms of lending, and other financial firms could become insolvent. Another fiscal stimulus could be needed if things get worse.”
OCED warned that longer term problems, including health care reform and the U.S. budget deficit, must be tackled, and that “the U.S. economy is going through an exceptionally difficult period” and despite major policy interventions, it is likely that “activity will get worse before it gets better.” The OECD suggested that the weakness will continue well into 2010, that “house prices appear to have further fallen, and foreclosures are widely expected to rise.”
It also recommended yet another stimulus plan, saying that “macroeconomic policy should stand ready to provide a renewed stimulus.” But it warned that, “given the underlying fiscal situation, the package should aim to be strictly temporary, timely, and targeted.” And it added that in the longer term, “the ageing of the population and other trends put the Federal budget on an unsustainable course” and said that increased tax revenue and controls on spending will be needed.
The OECD predicted that “resolving the financial crisis could be a long drawn-out process,” which could require substantial government spending just as in previous banking crises. So it argued that big rate cuts by the Fed, “appear to be roughly appropriate in light of the adverse effect on real activity” of the credit squeeze, and said that “monetary policy should remain highly accommodative for quite some time to support the economy and the financial system.” However, it warned that in the long run, the regulatory system needs to be fundamentally reformed, or else the rescue of troubled financial institutions “could inadvertently serve to encourage imprudent behavior” in the future.
“A major overhaul of regulatory and supervisory policy is necessary to remedy the deficiencies in oversight that the crisis revealed,” the OECD report said. It also called for reform of the supervision of mortgage brokers, underwriters, and credit agencies to protect borrowers and investors.
Some predicted in 2007 that the U.S. housing industry would bottom out and turnaround in 2008. That did not happen. Instead, one of the worst housing crisis’ in history took place in 2008.
In August 2007, defaults began rising on subprime housing loans. As 2008 ended, foreclosures rose to record levels, home prices fell, home inventory rose, and new home construction slowed considerably. In October 2008, the National Association of Home Builders (NAHB) called upon the U.S. Congress to provide “sorely needed” economic stimulus to encourage homeownership and limit foreclosures to pull the U.S. economy out of recession.
David Seiders, chief economist for NAHB, forecast that the steep decline in sales of new single-family homes should end early this year, making way for “tepid” improvement in new residential construction later in the year. Seiders remained reasonably optimistic that a housing recovery is beginning to take shape, even though the current, persistent housing downturn is shaping up as the worst in the post-World War II era.
“The uncertainties out there are unprecedented,” said Seiders, adding there’s a growing risk the current housing contraction could get even worse. “Things are a lot worse than any of us had anticipated six months ago [because of the state of the world financial markets],” he continued, noting the nation’s housing market—“the root cause of the collapse in confidence among lenders—has continued to spiral downward.”
Home prices fell throughout 2008, according to the Case-Shiller Home Price national index, which recorded a 16.6% decline 3Q compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter. Prices in Case-Shiller’s separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%.
“The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals.” said David Blitzer, Standard & Poor’s spokesman for the indexes, in a press release. “All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline...Prices are back to where they were in early 2004.”
Karl Case, a Wellesley economics professor who is the Case in Case-Shiller, said during a news conference about the latest index report that he would hesitate to put a number on how much further prices could fall, but the increasing job losses will surely worsen the situation. “There’s no cushion against unemployment,” he said.
Pat Newport, an economist with Global Insight, pointed out that the latest numbers don’t even capture the impact of some of the events of the past couple of months.
“The real economy took a sharp turn for the worse towards the end of the third quarter,” he said. “Since then, housing permits are down, the National Association of Home Builders index of activity dropped to a record low in November and purchase loan applications were down 15%. That’s telling us the housing market has worsened a lot.”
Overall housing starts declined 4.5% to a seasonally adjusted annual rate of 791,000 units in October, which was the slowest pace recorded for any month since the U.S. government started keeping track in 1959. Single-family starts declined for a fifth consecutive month, by 3.3% to 531,000 units, which was the slowest pace since October 1981. Multifamily starts fell 6.8% to 260,000 units.
Issuance of building permits, which can be an indicator of future building activity, was down across the board in October. Total permits registered a 12% decline to 708,000 units, the lowest rate for any month on record since the series began. Single-family permits fell 14.5% to a seasonally adjusted annual rate of 460,000 units, the lowest level since February of 1982. Multifamily permits fell 12.3% to 241,000 units.
Sales of existing homes in the U.S. fell more than expected in October 2008, according to the National Association of Realtors. Sales of existing homes fell 3.1% to a seasonally adjusted annual rate of 4.98 million units in October, from a downwardly revised pace of 5.14 million in September. The median sales price fell 11.3% from a year ago to $183,000. That was the largest year-over-year drop on records going back to 1968, and the lowest median sales price since March 2004.
In addition, the remodeling market continued its slump during 3Q 2008, according to NAHB’s Remodeling Market Index (RMI). The current market conditions indicator declined to 33.5, from 41.8 in the last quarter. Future expectations of remodeling work also slid to 27.7 (from 38.0 in 2Q).
“Remodelers reported another drop in major home improvements and expectations for future work have also declined,” said NAHB remodelers chairman Lonny Rutherford, CGR, CAPS, CGP, a remodeler from Farmington, NM, U.S. “A slight increase in minor remodeling projects for owner-occupied home suggests customers are cutting back on home improvement spending.”
Nationally, current activity for major additions and alterations shrank to 29.38 (from 43.18 in the second quarter) during the third quarter, while minor additions and alterations slowed to 38.51 (from 42.89). Maintenance and repair dropped to 30.92 (from 39.06).
NAHB said that the remodeling market is tightening due to more home builders taking on remodeling work, creating a more competitive marketplace and flattening out calls for bids and appointments for proposals.
Yet, while home prices decreased and interest rates held at historically low levels, the number of potential home buyers nationwide who can afford to buy new and existing homes reached the highest level in more than four years, according to the NAHB/Wells Fargo Housing Opportunity Index (HOI). According to 3Q HOI readings, 56.1% of all new and existing homes that were sold were affordable to families earning the national median income of $61,500, far more than the 40.4% of families who could afford homes at the peak of the housing boom.
Plunging Consumer Confidence
Low consumer confidence in the U.S. economy grew worse as the year went on. As early as late February 2008, Americans had a negative outlook on the economy, when the Conference Board’s Consumer Confidence Index hit a 15-year low.
“The Consumer Confidence Index continues losing ground and, with the exception of the Iraqi War in 2003, is now at its lowest level in nearly 15 years,” said Lynn Franco, director of The Conference Board Consumer Research Center. “The weakening in consumers’ assessment of current conditions, fueled by a combination of less favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggests that the pace of growth in early 2008 has slowed even further.”
Consumer confidence bounced back in November from an all-time low a month earlier, but still reflected weak economic conditions. But the Index, which measures confidence as a potential indicator of consumer spending, the main driver of economic activity, offered little hope of a quick recovery.
“The persistent declines in the present situation index suggest that the economy has weakened further in the final months of this year,” said Franco. “Inflation expectations, which have been at historically high levels in recent months, subsided considerably as a result of falling gas prices. But, despite the improvement in the expectations index this month, consumers remain extremely pessimistic and the possibility that economic growth will improve in the first half of 2009 remains highly unlikely.
The assessment of the labor market was more negative, which those saying jobs are “hard to get” rising to 37.2% from 36.6% in October, while those claiming jobs are “plentiful” decreasing to 8.8% from 9.0%.
Chief executives were pessimistic as well in 2008. The Chief Executive magazine’s CEO Index reached its lowest level ever in November, hitting 50 points (set at 100 points when polling began in October 2002). In all of 2008, the CEO Index dropped 56%.
Moreover, an unprecedented number of respondents—more than 90%—said they would rate current business conditions as “bad,” compared to 28% of CEOs who said the same in November 2007.
In November, a record number of CEOs—75%—said they expect employment to decrease over the next quarter, compared to 68% of CEOs in October and 41% of CEOs that said the same last November.
There is no doubt that the U.S. appliance industry will need to buckle down and weathering the economic storm this year. Hopefully, though, the recession will end soon and growth will begin again. Yet at the same time, consumers can expect the appliance industry to stay the course with product innovation, energy efficient appliances, and hope for good times ahead.
In a reflection of dire economic conditions, one respondent said, “The confidence of citizens and business alike has been shaken. It will take many months to inject some stability in the markets.”
Read our greatly expanded online coverage: North America Appliance Industry Forecasts for 2009: