When the recession will really end
Posted
Jun 16 2009, 02:40 PM
by
Catherine Holahan
Rating:
The worst recession since the Great Depression will
officially end sometime in the next three months, according to economists at
the nation's biggest banks. The Economic Advisory Committee of the American
Bankers Association -- aka the chief economists for JPMorgan
Chase, Citigroup,
Bank of
America, and most other major banks -- announced today that they expect that
nation's GDP to grow in the third quarter of 2009.
But most Americans will still feel as though they are living
through a recession well into 2010.
"The economy will return to growth but not to
health," said Bruce Kasman, chief economist for JPMorgan Chase in a
statement. "Growth in the coming quarters is likely to gather momentum but
will not prove sufficiently robust to undo much of the severe damage to our
labor markets and public finances."
Unemployment will continue
to stunt growth, keep Americans feeling poor
The ranks of the unemployed will continue to swell, with the
rate passing the 10% mark at its peak and likely remaining at or above 9.5%
throughout next year, according to the EAC. The unemployment rate is currently
at 9.4%, meaning about 14.5 million Americans are out of work. Each month,
hundreds of thousands more file initial unemployment claims. Just today, News
Corp.'s MySpace announced it would lay off up to 30% of its work force.
Watch:
MySpace Layoffs: 30% cut
The large numbers of jobless Americans will make even the employed
feel as though they are still struggling. It will continue to pressure
wages for working Americans, many of whom have already seen their salary
decline about 2.7% since June 2008, according to the U.S. Labor Department. The
slack labor market will slow the recovery in consumer spending, which is necessary for
businesses to see the sustained revenue growth needed to hire. It will also continue to fuel consumer defaults on everything from
credit cards to auto loans, causing banks to further clamp down on credit and
spurring many consumers to pinch pennies.
Talk back: When do you think the recession will end?
Banks won't open the
coffers anytime soon
As part of their forecast, the EAC revised its credit card default projections sharply
upward. The economists now expect that more than 5.2% of consumers will be late
on credit card payments this year and 5.2% won't pay at all. Those projections
are up considerably from the EAC's earlier forecast in January. Then the
economists expected that 4.2% of people would pay bills late and just 3.9%
of bills would be written off for non-payment.
The increase in projected defaults is large, but it looks
even bigger given the default rate just last year. In 2008, only 2.1% of
consumers failed to pay their credit card bills entirely.
"Back then [in January] there was an expectation that
unemployment would rise to 8.5% by the middle of the year ... peaking at 8.5% in
the fourth quarter," explained ABA spokesman Peter Garuccio. "We have
already surpassed that."
The ABA's numbers are for averages for all the banks. Individual consumer banks expect delinquency rates to rise even higher. So-called "charge offs" -- industry lingo for unpaid credit card bills that must be written off as losses -- are already at record highs for many banks. This week, Bank of America, the nation's largest consumer bank, said its credit card default rate rose to 12.5% in May from an already high 10.47% in April. Even American Express, a company known to have relatively more affluent consumers than competitors, said its credit card default rate rose to 10.4% in May from just under 10% the prior month.
High default rates are not confined to consumer credit cards. Auto loan issuers have seen large delinquency rates as well. Credit reporting agency TransUnion told the Associated Press this week that 0.83% of auto loans were 60 days late or more. That may not sound like much, but the rate was just 0.65% last year.
Such high default rates can only cause already cautious banks
to become increasingly stingy. Banks need to keep large reserves in order to
absorb losses on loans. When the federal government performed
its stress tests on the nation's 19 largest banks earlier this year to
determine how much money they should keep in their reserves to weather the
recession, it assumed that the unemployment rate and loan defaults would be
lower than they are currently. As a result, some
banks will likely need to raise even more capital, as well as be extremely
careful about the money they lend going forward. For example, Bank of America,
which the government said would
need nearly $34 billion, could need even more.
When will it really
end?
So when can average Americans start to feel some relief from
this recession? It's difficult to say. Unemployment typically peaks two months
after the official end of a recession. So, assuming the economy turns around in
July or August, unemployment would continue rising until the late fall and stay
high throughout the first half of 2010. That would mean Americans wouldn't
really start to feel better until next spring.
But, this isn't an average recession. Some believe that
businesses shed jobs faster than perhaps necessary on the expectation that the
global economy would be in even worse shape. As a result, businesses may hire
faster than the ABA's economists anticipate. It's also possible that employees
who feel relatively certain that they have survived their companies' last round
of cuts may begin spending more aggressively than economists expect.
All of this is speculation. What we know for certain is that
average Americans won't really feel that their personal financial situation has
improved until they can ask their employer to keep their salary in line with
inflation and, perhaps, even get a small raise for all the extra work they've
taken on since the company began firing and redistributing tasks. Such job security
could be a long time coming.
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