Comparisons to Great Depression Are Pure Babble, Says Economist

The gloom and doom surrounding the nation’s rising unemployment rate, now 8.1%, is so dramatically overstated that “it’s mind-boggling”, says economist James Smith, who maintains that some of the positive news is underreported.

“So many people are saying, ‘Oh my gosh, we’re going to spiral downward until there are no jobs left, and the unemployment rate is going to be worse than the Great Depression.’ Everybody else keeps babbling about the Great Depression with apparently no concept of how horrible things were then, how completely different they are today, and how irrelevant the comparison is,” says Smith, chief economist for Parsec Financial Management in Asheville, N.C.

But the jobs report released by the U.S. Department of Labor last Friday will do little to assuage fears. Non-farm payrolls fell by 651,000 in February, boosting the national unemployment rate from 7.6% to 8.1%. Employment in professional and business services dropped by 180,000, followed by sharp losses in manufacturing (168,000) and construction (104,000).

Another troubling sign for the commercial real estate industry is that the number of leisure and hospitality jobs fell by 33,000 in February. No sector is as closely linked to gross domestic product (GDP) as the hotel sector. That’s significant because GDP contracted at a 6.2% annualized rate in the fourth quarter of 2008.

“We know that companies are afraid to have conferences [amid today’s recession], so people like me who make a big part of their living speaking at conferences make less money,” says Smith.

Bucking the negative trend in February were the health care industry and government, which added 27,000 and 9,000 jobs respectively. Employers have shed about 4.4 million non-farm payroll workers since the recession began in December 2007.

“We’re losing jobs at this sort of pace because a lot of companies can’t see any hope,” explains Smith. Extremely weak consumer demand for an array of goods and services is playing a big factor. The number of vehicles sold annually in the U.S., for example, historically has ranged between 16 million and 17 million. Revised forecasts for 2009 range from 9 million to 9.5 million in vehicle sales.

Even so, today’s economic woes are a far cry from the nearly 25% unemployment rate reached in 1933. The recession of 1929, which evolved into the Great Depression, lasted a whopping 43 months. By comparison, today’s recession is now in its 15th month.

With so much anxiety surrounding today’s weak economy, what’s the good news that’s not getting attention? “Consumer wealth is still high, and consumer sentiment seems to be improving slightly from either record lows, or near-record lows,” says Smith.

The Federal Reserve estimates that the net worth of U.S. households — the difference between the value of assets and liabilities — was $56.5 trillion at the end of the third quarter of 2008. That figure is down $2.8 trillion from the prior quarter and below the peak of $63.6 trillion in September 2007, according to media reports. (Updated figures for the fourth quarter of 2008 are due out later this week.)

“I would be giving far more upbeat speeches,” suggests Smith, referring to President Obama’s sobering economic outlook, “and point out that we have over $50 trillion in net worth in U.S. households. That’s four times GDP. Get out there and shop.”

While he argues that the unemployment situation is overblown, Smith believes that the weakened state of the credit markets can’t be overstated. “We’ve been in a panic since Aug. 9, 2007. We are still in it,” he says. “Until the three-month LIBOR (London Interbank Offered Rate) drops another 100 basis points, or until three-month Treasuries go up 100 basis points with no change in LIBOR to get that spread down to less than 10 basis points, we’re in a panic.”

Currently, three-month LIBOR is about 100 basis points higher than the yield on the three-month Treasury bill. Eight to 12 months ago, the spread was 400 basis points. In normal times, the spread between the two financial benchmarks is only a few basis points, says Smith.

Although the credit crunch and recessionary environment are taking a toll nationally, not all regions of the country are equally affected. Some markets are weathering the storm quite nicely. Oklahoma City, for example, boasts an unemployment rate of only 4.6%, up from 4.2% a year ago.

Aerospace, health care and education are Oklahoma City’s primary industries, says Smith, who delivered a speech to the local Commercial Real Estate Council last Tuesday. “I’m happy to say that it is a very healthy market. They don’t quite understand what all the fuss is about.”

Oklahoma City benefits from the fact that it is not a financial hub. “All the financial hubs in the world are hurting,” says Smith, “whether you are talking about London, Frankfurt, New York, Charlotte, San Francisco, or Chicago. Why? They did some bad things and got caught up in it.”

But this crisis too shall pass for the financial community, Smith says. “If you think back to the 1987 stock market crash, it took New York five or six years to have more financial services jobs than it did at the time of the crash, but it got there.”

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