The financial market meltdown has stabilized. That's the good news. Unfortunately, sanity has not returned.
Large swings in the equity markets are now a way of life. But concerns about the potential failure of additional major firms have dissipated. However, the key question still remains: How long and how steep will this recession be and how do we get out of it?
That we are in a recession is no longer a question. One look at the jobs numbers confirms it. Businesses cut workers for the 10th consecutive month in October, and the job losses are accelerating. When you add the 240,000 lost positions to those that came before, 1.2 million jobs have disappeared this year. Shrinking payrolls mean rising unemployment; the rate now stands at 6.5 percent, the highest level since March 1994.
What is amazing is the speed at which firms have reacted to the faltering economy. Normally, managers retain their people as long as possible, out of fear of losing them. But with real-time information about the state of the economy, companies appear to be hunkering down and looking to ride out the storm.
The first places they look for cost savings is their labor expenses, and they have moved quickly to adjust.
The job-loss implications are truly troubling. Falling employment means less income, and that really translates into declining consumer spending. That is made all the worse by the collapse of consumer confidence to some of the lowest levels we have ever seen.
The retail sector has been hurt, and this is likely not going to be a very merry holiday season for many. That also points to problems in early 2009, as firms that didn't make their numbers during the holiday rush go out of business.
But the most-vexing problem is the credit markets. Although the Treasury and Federal Reserve have avoided the threatened meltdown, the survivors are in no mood to extend credit to very many people.
The old saying that banks will lend to people who don't need the money, but will not give money to those who do, seems to be happening. It is more difficult to get credit cards, limits are being reduced, and even home equity lines are being cut. Households and businesses alike are having a tough time getting loans.
Tight credit has harmed a number of major industries. Motor vehicle sales dropped to the lowest pace in 25 years. The evolving stabilization in the housing market was set back as mortgage requirements were stiffened.
No Call for Depression
The growth restraints are extensive, but we don't have to fall into a depression. The Treasury and Fed are easing the problems, and conditions are improving, albeit slowly. The rapid adjustment of firms holds out hope that job losses will slow sooner than normally would be expected.
But the wild card in all of this economic turmoil is psychology. Households and business executives are all worried and are reacting accordingly. Many who can spend are not. Ultimately, the depression will wear off, and spending will pick up.
It is possible that rising confidence could lead to a surprisingly large increase in growth. But that may not happen for another year, so we may have some tough times to ride out.
Joel L. Naroff, Ph.D., is chief economist for TD Bank.