Economic Update: The recession is over...what now?

-10.16.2009

The National Association of Business Economics released their outlook this past week.   Below is a summary taken from the NABE website ( www.nabe.com).

Basically, the NABE Outlook indicates that the recession is over.   However, we can expect slow growth to follow, similar to the U shape recovery we have discussed previously in this column.

There was one particular line that really stood out by one of the presenters.  He indicated that his forecasting firm expects consumption spending to decline to approximately 60% of GDP over the next ten years.   Consumption spending currently represents about 70% of GDP.    We’ll discuss what this means to business in future columns.

NABE Outlook: Recession Is Over, but a Muted Recovery to Follow
October 2009

SUMMARY: “The Great Recession is over,” according to NABE’s latest survey. “The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines. The NABE panel upgraded the economic outlook for the next several quarters, compared with the previous survey,”said NABE President-elect Lynn Reaser, chief economist at Point Loma Nazarene University. “Following a sharp 6.4 percent (annual rate) contraction in the first quarter of this year and another 0.7 percent drop in the second quarter, NABE forecasters expect real GDP to rise at an above trend 2.9 percent rate in the second half. The more-than-three-year downturn in the housing market is very close to coming to an end, with substantial growth (from a low base) expected for next year. According to the survey, the key areas of concern involve the large increases in federal debt and unemployment rates that are expected to remain very high through next year. The unemployment rate is forecast to rise to 10 percent in the first quarter of next year and edge down to 9.5 percent by the end of 2010. Inflation is expected to remain contained throughout 2010. The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation.”

Update on Selected National Indicators

We continue to see reductions in national inventory levels.   This began late last year as manufacturers, wholesalers, and retailers began slashing inventories in response to the expected lower demand.  These reductions in inventories walloped the manufacturing sector, and significant employment losses ensued.

The latest business inventories report shows that the national inventory to sales ratio continues on a downward trend (See Figure 1).   For a sustained recovery in manufacturing, this is both necessary and welcomed news.  As this ratio declines, manufacturing will continue to resume production to replenish lower inventory levels.   Two regional measures of manufacturing released this week provide further evidence of this manufacturing recovery now underway (See Figure 2).

The lower inventory levels leading this recovery might be viewed as a tailwind for the manufacturing sector.   Conversely, there is also a strong headwind:  the staggering numbers in consumer debt levels.     The most recent release by the Federal Reserve indicates another decline in consumer debt.  As you can see from Figure 3 below, the latest decline continues on a path that began the middle of last year.

What does this reduction in consumer debt mean for manufacturing?   Well, let’s separate manufacturing into non-durable goods and durable goods.  Non-durable goods include items like clothing, food, and chemical manufacturing.  Durable goods include items like furniture, automobiles, TVs, machinery and capital goods, and items that generally have a life lasting longer than three years. 

From a consumer standpoint, the distinguishing characteristic between durable goods and non-durable goods is the method of payment.    Most durable goods purchases are credit sensitive.  That is, the consumer usually relies on some form of credit to make the acquisition.  It is this continued decline in consumer credit that will serve as a major headwind to domestic manufacturing, subsequent to the inventory restocking recovery. 

Figure 1

Source:www.barrons.com

How could Indiana be impacted by this trend of declining consumer debt?    Durable goods purchases typically require debt, and so this will impact the consumer’s taste and tolerance for debt-financed durable goods purchases.   This is significant to Indiana because 70% of manufacturing employment is in the durable goods sector.   So while we are beginning to see a recovery in manufacturing, the change in consumer habits suggests that we will see a mild recovery, especially once we replenish inventory levels.  The key for manufacturing will then turn to exports. 

 Figure 2

Source:  www.barrons.com

 Figure 3

Source:  www.barrons.com

Suggestions

If you have any suggestions on future columns or research about specific industries or other economic data, please send me an email at udufrene@ius.edu.

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This information is provided by

Uric Dufrene. 

Uric Dufrene, Ph.D. holds the Sanders Chair in Business in the School of Business at Indiana University Southeast.  He conducts research on local and regional economic trends, and teaches corporate finance at the undergraduate and graduate levels.   He previously served as dean of the School of Business.