The last recession, you'll no doubt recall, arrived in the aftermath of the attacks on September 11, 2001. Since then, the economy has recovered and has been growing at better-than-expected rates. The stock market has also ventured into record territory, with multinational mergers becoming something of a weekly occurrence over the last five years.
So what's raining on our economic parade? Three things:
- The Credit Crisis: banks, lenders, and investors have suffered heavy losses on those now-gone subprime mortgages — some companies have lost literally tens of billions of dollars. One of the nation's largest providers of subprime mortgages, Countrywide Financial Corp., recently reported that its mortgage loan production sank by almost 50% in October from the same period in 2006. That's especially bad news for homebuyers because Countrywide is the nation's largest mortgage lender. Having suffered such heavy losses after a period of sustained growth, lenders have suddenly and severely raised standards for qualifying borrowers. With this lack of funds already slowing down the economy, experts believe that it will continue to have a negative impact on companies which rely on consumer spending. With the holiday shopping season already begun, this doesn't bode well for retailers, restaurants, and entertainment outlets.
- The Housing Nightmare: just last week we learned that home foreclosures have seen astronomical rises in many of what used to be lucrative real estate markets. In Florida, foreclosures have doubled since this time last year; in Nevada, they've tripled; and in California, they've quadrupled. Richard Berner, an economist with Morgan Stanley, recently observed a drop in total home sales between 30 and 42%. With banks raising the bar for potential loans, fewer would-be home buyers (including those with good credit and heavy incomes) are able to enter into the real estate market in the numbers they were at its peak two years ago. Thus, the inventory of unsold homes is multiplying weekly, while prices continue to fall. Moreover, new home construction has all but dwindled to a standstill, driving some construction companies to file for bankruptcy. Don't be surprised if that luxury family home down the street which hasn't sold in over a year is suddenly put up on the auction block.
- Oil Prices: Unless you've been living under a rock the last few weeks, you'll have noticed that oil prices have been on an upward march into record territory, driving up everything from gas prices to home heating costs to the price of milk and bread. Traditionally, oil and gas prices fall during late autumn and early winter, but this year they've been ticking up with no end in sight. Why? The usual culprits of supply fears and political turmoil in the Middle East are being blamed, but there are also some new factors: China and India, both with supersize populations and booming economies, have witnessed an explosion in their middle-class populations, which are increasingly dependent on fuel and energy resources. By one estimate, China is on target to consume as much oil as the United States in three years. And with the projected demand expected to outpace supply levels, prices will continue to rise.
No doubt you're thinking, "Well, that's a heap of bad news!" — and indeed it is. But there are some things which need to be recognized to keep things in perspective as the bumpy economy gets even bumpier in the coming months.
First, recessions occur about once every six years — they are an inevitable fact of the modern economic system and typically last about 10 months. Second, a bullish stock market usually corrects itself within 222 days; a correction is defined as a 10% decline in a major stock index, and it certainly seems we're in the midst of one now after nearly 900 days of a bull run. And third, there are actually some benefits to a recession.
Benefits? To a recession? The very notion may seem counterintuitive, but recessions can actually do the economy and consumers a measured amount of good.
Record profits of a strong economy inevitably drive up the price of goods and services. A recession helps to control inflation. A weak economic market translates to higher unemployment and fewer spending dollars, which in turn puts the brakes on companies' ability to raise prices. On the flip side, few people get a raise in their salary when companies can't raise prices.
Recession also does a fairly good job of weeding out bad investments and risky financial ventures. A "good" recession will highlight bad bets. These corrections are good for the economy in the long term, though they frequently cause a good amount of immediate frustration on the part of investors who see their capital shrink by large percentages.
A recession might also lower the national price of real estate, which could help encourage more buyers to take advantage of an already weak and discounted market. If homes become substantially more affordable, it could bring new life to the housing market, which is still expected to slide for at least the next 12 to 15 months.
Some analysts also believe a drop in oil prices could come as a result of recession. This is still a long shot, but if consumers' wallets are pinched enough that they are forced to cut back on driving, flying, and heating their homes, it could lead to widespread reduction in demand for oil, which would help lower prices.
On top of all that, recent studies have found that there is a correlation between unemployment and physical health — and it's not what you're expecting.
Economist Christopher Ruhm, a University of North Carolina-Greensboro researcher, has compiled data from 1972 to 2000 which he asserts demonstrates that a 1% rise in unemployment reduces death rates by 0.5%. His paper, published in the National Bureau of Economic Research, concludes that when the number of job opportunities decreases, both the gainfully employed and unemployed adopt healthier living habits.
Ruhm observed that in times of recession or slower economic growth, workers actually increase the amount they exercise, eat less, and visit their doctors more often. He additionally noted that heavy smokers and the obese were most likely to make the most dramatic changes in their behavior.
But there are a couple of caveats which Ruhm is careful to note. Mental health, for example, was not found to improve under harsher economic strains. And no doubt, moving from a poor economy to a stable, industrialized one is good for everyone:
"My strong belief is that moving from Bangladesh to the United States is very good for your health. There's no question about that," he said.
One of the challenges to individuals working in a developed economy is the double-edged sword of technology: technology provides long-term growth, but its developments are unevenly paced and can bring as many damaging effects as they do benefits.
For example, technology has unquestionably helped improve productivity, but in spite of this, American workers are putting in longer work weeks and report increased stress. Americans are also exercising less and eating more with the advent of laptops, high definition TVs, and easy access to mass-produced synthetic foods. Obesity is at an all-time high. If technology is supposed to improve the quality of life, shouldn't the opposite be true?
Ruhm compares the situation to that of pollution, saying that economic growth brings new technologies which decrease pollution, but the pace at which those technologies emerge is uneven and cannot be predicted, resulting in increased pollution during an economic boom.
Ruhm observes that "some of those byproducts (of growth), particularly in the short run, are bad for your health."
In the onslaught of so much troubling news about the economy, it helps to know that, at least for some, recessions are not all bad news and that we can not only survive a market downturn, but take advantage of its unique opportunities to improve other parts of life.
