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How Long Will ‘Walking Pneumonia’ Economy Last?

Posted by Larry Doyle on July 20, 2010 6:28 AM |

I have told many people that I equate our current economic situation to a serious case of ‘walking pneumonia.’ If you have suffered from that dreadful malady, as I have, you can appreciate my sentiments. While we are going to live, and will move on from our current condition, the question everybody wants to know is how long will this sluggish, sickening episode last?

I wish I was so prescient as to be able to pinpoint the month and year when our economy may return to real vitality. I am neither that smart nor that egotistical. I do strongly believe, though, that we are looking at a number of years of continued underperformance.

I have shared that assessment with many since the crisis unfolded in 2008.

I view myself as an eternal optimist, and will not change my positive outlook on life in general. That said, I am also a pragmatist and realist, and understand that our economy is attempting to adjust to the massive loss of credit connected with the securitization markets. I NEVER hear anybody in Washington reference the fact that the securitized markets for residential mortgages (conforming and Jumbo), consumer credit, and commercial mortgages had reached 40-45% of the total credit supplied to our economy. These markets — with the exception of the conforming mortgage market — and the accompanying credit are now barely trickles. Given the continued presence of inordinate volumes of poorly, if not fraudulently, underwritten loans on banks’ books, I do not expect a rebound in these markets anytime soon.

In light of this fact, is it any surprise why our economy feels so stressed and strained? How would you like to function with only 60% lung capacity? Well, that in fact is largely what our economy is doing. You might feel like you have ‘walking pneumonia,’ no?

How do American consumers feel? A recent study by Alix Partners highlights Americans Don’t Expect a Return to Pre-Recession Spending Levels, Lifestyles:

On average, Americans don’t expect their quality of life, including their spending levels, to return to pre-recession levels until mid-2013, according to the findings of a survey released today by AlixPartners LLP, the global business-advisory firm.  The poll also finds that seven in 10 Americans today feel the same or worse about their personal economic situations than a year ago, during the depths of the recession, and that 83% expect to spend the same or less on non-essential purchases over the next 12 months, illustrating an ongoing frugality that’s hampering prospects for a consumer-driven economic recovery.  The survey was conducted recently as a reprise of similar AlixPartners surveys in 2009 — one in February and another in November.

According to the poll, Americans are also decidedly less optimistic about a quick recovery in the economy at large than they were in 2009, another factor in restrained spending.  The majority of respondents, or 63%, now say that an economic recovery won’t take place until 2012 or later, versus the 46% who felt that way in November and 40% who picked that year or later in early 2009.  The proportion of Americans who now believe that a recovery will take place this year or next: just 5% and 12%, respectively.

“When we polled Americans last November, they expected their personal spending levels and lifestyles to be back to pre-recession levels by, on average, November of 2012, but now they’re saying not till August of 2013,”  said Fred Crawford, CEO of AlixPartners.  “Obviously, despite some modest movement forward in the economy, individual Americans remain greatly concerned about their personal economic situations.  In the past, AlixPartners has talked about this could translate into a ‘new normal’ environment for businesses of all types that rely upon the American consumer:  lower plateaus of consumer spending for years to come, maybe for the foreseeable future.  Today, it looks like this new normal is already happening.”

Is 2013 a reasonable expectation for an economic turnaround? Who is to say? Whether our economy recovers in 2012, 2013, or 2016, real ‘sense on cents’ dictates that Americans learn the value of living within — if not slightly below — our means.

That timeless lesson has neither a start date nor end date. Practiced appropriately, it is a tremendous guide as we collectively navigate the economic landscape.

LD

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  • whoisjohngalt

    Larry, in a low growth to a slightly deflationary period PE ratios go up. Utilities offer a fairly safe haven with many at 5% yield and PEs of 12. Also, big companies that have reduced costs and are making $ can be attractive. However, if the bottom does drop out in the economy, then stocks can drop but people still need utilities.

  • Bruce

    Sounds like one long hangover after a very long binge.

  • whoisjohngalt

    There was this analyst from Schwab who showed a chart that if you buy stocks when the growth rate is high, then your rate of return is poor. This would be the sheepeople buying at the top. The best returns were to buy stock between -3 and +2% growth. You are not one of those inflationary dudes who have been wrong for years are you?

  • Mike

    Full recovery begins 09/2021.

    Boom.






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