Orchard Lake, Michigan, August 3rd, 2008. A modest-sized office building with room for twenty tenants just north of this town of well-to-do homeowners does not have a single tenant. It is not unusual for homes here to sit on the market for two years. Large supermarkets have simply closed, a sign here that even Kroger did not have enough customers to cover the overhead. Some of the strip malls do not have a single tenant.
The unemployment rate in Michigan is 8.5%, 55% above the national average. Most of the difference is due to the loss of jobs in the auto industry, but the economic picture is not unlike that seen nationwide in 1974.
Nouriel Roubini, prominent economics professor at New York University, recently told Barron’s that the economy will get worse in the second half of this year, once government rebate checks have been spent. He believes that the US is in one of the deepest recessions in its history and that the hard times will last well into 2009. He sees the real estate crisis getting worse and argues that 8% of US banks are in deep trouble, in excess of 700 institutions.
The reasons the overall US economy will get much worse over the next four or five quarters are simple which makes it easy to divide the recession believers from the non-believers.
At the heart of the credit problem is the question of whether the consumer can manage his current debt load. That load is so large that it rules out much future spending. This means that most retail businesses are in for extremely significant declines in business.
As consumer spending disappears, the unemployment rate will spike up sharply. Airlines, auto companies, retailers, and financial companies are already in the midst of large lay-offs. Trouble could easily spread to the tech and telecom sectors which have been important pockets of improving employment for several years.
The consumer’s inability to balance his books, made worse by rising gas and commodities prices, makes it likely that there will be an accelerated rate of defaults on mortgages, credit cards, auto loans, and second mortgages. A large portion of the write-offs that will be associated with this crisis will work its way through American bank P&Ls in the next twelve to eighteen months.
The is no longer any gravity at the center of the US economy. Easy credit, available to fuel consumer spending, has disappeared. The value of homes, after going up sharply for almost two decades, is in the midst of a correction that could take down prices by as much as 40% before the resetting is done.
The value of corporate assets is moving down with equal rapidity. Write-downs of assets and write-offs of goodwill could hit levels not seen in years. Corporations in the airline, retail, auto, and newspaper industries will have to revalue property which has been undermined by eroding fundamentals.
The 1974 recession, which was probably the worst since the Great Depression, took national unemployment above 8% and inflation in excess of11%.For a number of Americans, it is hard to imagine that after a period of prolonged prosperity the economy could fall so hard so quickly.
In the area around Orchard Lake, business was good as recently as two years ago. Real estate prices were moving up. Unemployment was at a modest level.
Now, one in ten homes in this county is for sale. If lay-offs in the car industry and related businesses continues to rise, unemployment could certainly move well over 10%.
This part of the country is a microcosm of what the entire nation may look like a year from now.
Douglas A. McIntyre