2009 Will Be a Challenging Year

By Anirban Basu

The National Bureau of Economic Research recently concluded that the recession began in December 2007. While it is true that Gross Domestic Product (GDP) enjoyed a nice rebound during the second quarter of 2008, most macroeconomic observers have dismissed that three-month period as an aberration.
More than $100 billion in tax rebate checks mailed between late April and early July boosted spending temporarily this summer, but the magnitude of the checks fell far short of fomenting a self-sustaining expansion. By September, there was scarcely any evidence that a stimulus package had been implemented just a few months earlier. Even the third quarter GDP release (-0.5%) probably doesn't reflect fully the weakness of the economy as it presently exists.
That's because September and October 2008 were game changers. Financial markets became so unsteady and volatile during these months that, by mid-September, the economy found itself on a deeper, darker, more downward trajectory.
As a result, September, October and November job numbers were simply terrible, with the nation losing roughly a million jobs during the course of those three months. The number of jobs destroyed on a net basis during the first 11 months of 2008 was nearly 2 million, with distribution, construction and manufacturing leading job totals lower.

More to Come
If anything, monthly job losses are set to expand, particularly during the first quarter of 2009, which is shaping up to be particularly horrific.
The reasons for the ongoing economic weakness are obvious in and of themselves, but are so numerous that they are worth listing for purposes of organizing a comprehensive discussion:
1. Sagging consumer confidence;
2. Pre-existing consumer debt caused by a decade of overconsumption;
3. Unwilling banks;
4. An overhang of unsold homes and an ongoing foreclosure crisis;
5. Declining housing wealth;
6. Shattered financial markets;
7. A credit crunch that has ravaged the commercial paper, student loan, municipal bond, auto loan and credit card markets among others;
8. Rising unemployment (November's 6.7% unemployment rate represented a 15-year high);
9. Declining employment in virtually all key sectors of the economy, with a dwindling number of exceptions, such as health care and government;
10. The profound weakness in America's auto sector;
11. Growing skepticism regarding the $700 billion Troubled Asset Recovery Program and its ability to move the banking system and the economy forward;
12. Shaken small business confidence;
13. Declining business investment;
14. Falling corporate profits;
15. Weakening government finances at state and local levels; and
16. A rapidly slowing global economy.

Shared Misery
Among the newest phenomenon worth discussing is the slowing of the global economy. Coming in 2008, there were economists in various parts of the world that believed that even if America's economy stumbled, most other parts of the world economy could soldier forward with little resistance.
They were wrong. America's economic weakness has steadily enveloped much of the balance of the world. The International Monetary Fund (IMF) recently slashed its global economic forecasts in the face of a growing credit crisis that already has robbed the world of trillions of dollars in wealth and functioning financial relationships.
In a recent update of its World Economic Outlook that was released last October, the IMF said global growth would slow to 2.2% in 2009, down from the 3% forecast made just one month earlier. Global growth of 3% or below is considered global recession, though there are plenty of economists who believe this cut-off point is arbitrary.
This spells trouble for the U.S. economy and greatly complicates prospects for our recovery. Exports have been a leading source of growth in recent quarters and the only major economic element able to support expansion without direct government assistance.
With the world economy now slowing and with the dollar rising sharply in recent weeks, a response to the risk aversion of the global capitalists and their corresponding hunger for U.S. treasuries, export growth is set to slow dramatically in the year ahead. While this may not result in too many jobs lost (since U.S. exports tend to be capital intensive), this leaves the federal government as the only major source of economic growth in 2009.
But the softening of export growth is hardly America's most vexing problem. Unlike the mild and brief 2001 recession, this recession is consumer-led. It is for this reason that this recession will be far longer and deeper than either the recessions of 2001 or 1990-91. Consumer spending is already collapsing, and given the pace of job loss now taking place, there is only one place for consumer spending to go, absent another major stimulus package: down.
Even before October's financial market meltdown, retailers were reeling. Sales at some of the nation's best-known retailers fell by double-digits in September, highlighting the economy's accelerating deterioration and raising questions regarding which chains will survive to see the early years of the next decade. October's retail sales represented the largest decline on record. November was even worse.

Corridor Holding Its Own
According to data from the Bureau of Labor Statistics, however, the Baltimore-Washington area continues to fare much better than the nation as a whole. In the Baltimore area, home prices have been more stable, employment has not declined nearly as quickly and unemployment stands at 5.1% as of October 2008.
In fact, according to the Bureau of Labor Statistics' establishment data series, employment in the Baltimore region has increased by 7,000 jobs during the past 12 months through October, even as it declined nationally. It has undoubtedly benefited from its massive health care, medical research and federal government sectors.
The region's job performance is also a reflection of its lack of manufacturing presence and associated lack of exposure to the inventory cycle. Howard County continues to report the region's lowest unemployment.
For the most part, the situation in Maryland's D.C. suburbs is similarly benign. Though home prices have not been quite as stable, unemployment remains manageable and federal activities continue to expand.
In the overall Washington metropolitan area, which also includes Northern Virginia and the District of Columbia, more than 30,000 jobs were created during the year ended in October. Montgomery County reports the Maryland/D.C. suburban region's lowest unemployment.
One issue for the area is the large inventory overhang of unsold homes in Prince George's County, which will continue to place downward pressure on home prices throughout 2009.

Anirban Basu is the chairman and CEO of Sage Policy Group in Baltimore. He can be contacted at 410-522-7243 and abasu@sagepolicy.com.