Beware the Second Leg of the Next Great Recessionhttp://www.fool.com/investing/value/2010/03/25/beware-the-second-leg-of-the-next-great-recession.aspx Richard Gibbons
March 25, 2010
There's no doubt that there are green shoots in the economy. The housing market, which helped bring on the crash, may finally be starting to recover. Housing stats bottomed in January, and it looks like the rate of decline of housing prices is slowing. The charge-off rate may be peaking at Capital One (NYSE: COF ) , while American Express (NYSE: AXP ) recently reported charge-card growth. And corporate earnings aren't as big a disaster as everyone thought they'd be.
But now is not the time to be complacent.
Delusions of grandeur
But beyond that, it's unclear when the real economy will recover. America's gross domestic product (GDP) was plummeting, and it now seems to be rebounding, but that isn't a great indicator of a recovery. It's almost inevitable that without a complete financial collapse, GDP won't keep shrinking for long. A big part of the decline in GDP has been owed to inventories, which had been plummeting since October 2008. But manufacturers eventually have to increase output or they'll run out of widgets to sell, and that boosts GDP figures.
What's more, the government has been throwing money at the economy to try to reverse the vicious cycle of layoffs resulting in lower corporate sales, which in turn lead to more layoffs. This, too, props up GDP, so it's not really surprising that GDP seems to have bottomed.
The key to recovery
The government isn't the key to recovery. Neither are corporations. Consumer spending matters most, accounting for 70% of GDP. But right now, consumers are acting as cheap as a congressman who has to spend his own money.
Americans seem to have finally realized that taking on a third mortgage to buy a second 74-inch TV for the bathroom is not a sensible decision. Household debt, which has been steadily rising since the 1950s, has actually started to decline. And consumer confidence, while improving, only looks good when you compare it with the all-time lows it hit last February.
But why should consumers be confident? The unemployment rate stands around 10%. As if that weren't bad enough, when you include the number of underemployed workers, that figure rises to 17%.
And you expect consumers to help the economy rebound? Good luck with that.