Anatomy of the 2009 Economic Crisis: Layman’s Primer 3

But, first, where do we stand now, in late February, 2009?

The Federal Reserve forecasts that the US Gross Domestic Production (GDP) will decline by as much as 1.3% in 2009.

They also project that the unemployment rate will reach 8.8%  in 2009, will not decline below 8% in 2010, and will range between 6.5%-7.6% in 2011. The Bureau of Labor Statsitics, in its January, 2009 report, revealed that nonfarm payroll employment fell sharply in January by 598,000,  and the unemployment rate rose from 7.2 to 7.6 %,  Payroll employment has declined by 3.6 million since December 2007, with about one-half of this decline occurring in the past 3 months.  In January, job losses were large and widespread across nearly all major industry sectors. 

The Housing Market

The root of the financial and economic crisis exists in the housing market, where foreclosures have risen above 3.4-million homes, and is forecast to worsen in 2009 as more than 3 million sub prime, option pay mortgages reset around mid-year. Another 2 million are scheduled to reset in 2010. We may see as many as 6.4 million foreclosures through 2011. Currently, we are averaging  about 9,000 foreclosures daily.

In 2008 the median price of housing fell 15.3% from the December 2007 figure of $207,000. The Real Estate Housing Predictor national forecast, predicts an average decline of 12.6% in home values in 2009.

Recently released data for 2006 revealed the worst housing market in 17 years. Sales of existing single-family homes fell 8.4% in 2006, to about 6.5 million, the biggest annual decline since 1989 when sales fell 14.8%. Housing sales continued their decline in 2007 and 2008.  Further disheartening data was released recently by the S&P/Case-Shiller index of home values nationwide which indicated a 19% decline in the past year, 2008, and a 26.6% plunge from its peak in June 2006.  Thus many owners with mortgages can’t afford to sell, and that along with tight mortgage credit will keep the financial markets in disarray.   

Consumer Spending

Consumers are cutting spending drastically, and remember aggregate consumer spending accounts for about 80% of the U.S. Gross Domestic Product (GDP). In December, 2008, consumer spending fell by 1 percent, the 6th straight monthly decline. With companies cutting payrolls, incomes fell by 0.2 percent after November’s 0.4 percent decline.

With broad indicators of US market activity showing a dismal picture can this all be turned around soon? It depends on how focused the new President’s stimulus package is on the root cause of the problem.

Banks are still in deep trouble, and a great deal of the bailout funds are not being used properly by them to assist the financial markets.  The bailout funds are being used to protect the bank’s own butts, and to gain market share by buying competing banks.  So, much of the credit system is still frozen.