U.S. policymakers’ hasty comparisons of the unfolding recession to the Great Depression in 2008 triggered a panic that virtually halted discretionary spending by consumers and businesses alike, according to James Paulsen, chief investment strategist at Wells Capital Management.
“This country developed a culture of the second coming of the Great Depression faster than I remember in any past recession,” Paulsen told business leaders at a forecast gathering Jan. 21 in Austin, Texas. Paulsen keynoted the event, hosted by Austin-based economic development advisory firm AngelouEconomics.
Too many bad loans, excessive consumer debt, unemployment and other economic factors did push the nation into recession, Paulsen says, but those occurrences were common to many previous downturns. What, then, made this recession so deep, with a contraction of nearly 6% in gross domestic product (GDP), more than 7.3 million job losses and, at 10%, the highest unemployment rate in 26 years?
“At least half of [the reason] was just because we froze all economic players into paralysis with fear,” Paulsen contends. “Our biggest issue in this recession was our healthy players and our healthy companies that just quit spending and quit hiring for awhile, simply to see where this Great Depression was going to go.”
Yet the steps taken to prepare for a crisis of 1930s magnitude are poised to propel a rapid recovery once easing fears turn to confidence, a trend Paulsen says is already evidenced by “green shoots” such as positive GDP growth and slowed job losses. He believes the nation will continue to benefit from reactive strategies prompted by anxiety that permeated both consumer households and the halls of government.
Stockpiled funds ‘a big asset’
Businesses and consumers have been stockpiling their buying power and together sit on a mountain of money equivalent to 70% of GDP or about $10 trillion, says Paulsen, who bases that figure on his own analysis of Federal Reserve Flow of Funds data. “That’s a big asset, and it’s only there because of the fear we created.”
Paulsen views the wave of stimulus measures enacted by Washington to counter the recession and credit crisis as an overreaction, but says the economy will certainly enjoy accelerated growth as the effects of massive deficit spending begin to show up later this year. In fact, he predicts that the Federal Open Market Committee will have to begin interest rate tightening this summer as the money supply and growing economy add to inflationary pressure.
Joblessness will continue to be a problem for the next two years, Paulsen says, and the painful process of bank failures and writing off bad debt must run its course. Eventually, however, employers must increase hiring to meet demand for goods and services. Current business inventories are at their lowest point in a decade and orders for capital goods are rising.
Paulsen didn’t address commercial real estate’s woes during his presentation on the national outlook, although his projection of a weak job market through 2011 suggests further softening in demand for commercial space and rising vacancy rates are ahead for most property types.
Trade could aid U.S. growth
A forecast published this week by commercial real estate service provider Jones Lang LaSalle calls for capitalization rates to reach a peak as early as the first quarter of 2010, but weak fundamentals mean asset values throughout the nation will continue to decline during the first half of the year before stabilizing in the third quarter. On average, commercial property values will have declined 50% from peak to trough, the company predicts.
Retail landlords and tenants stand to gain this year if consumers revert to at least some of the consumption patterns that fueled growth in the sector earlier in this decade. Coupled with the trading benefits of a weakening dollar, Paulsen believes that conservative spending by U.S. consumers in the years ahead will be offset by foreign consumers with an appetite for U.S. exports.
Consumer spending in emerging markets such as China, India, and former Soviet states has skyrocketed in the past five years. In 2008, average private consumption expenditures in developing nations equated to an average of 91.7% of U.S. consumption, Paulsen says.
If U.S. exports grow to contribute another 100 basis points to GDP, Paulsen says, then spending by savings-conscious U.S. consumers can hum along at 2% of GDP rather than returning to its historical level of 3%. “Trade is going to be an important part of our future growth,” he says.