Light at the End of the Tunnel?

Tom Corbett, Challenges for Human Services columnistby Tom Corbett

The current recession is now in its eighteenth month, making it the longest economic downturn in the postwar period. Moreover, real gross domestic product (GDP) fell by 6.1 percent on an annualized basis in the first quarter of 2009, following up on a 6.3 percent decline in the last quarter of 2008. The cumulative drop in GDP since mid-2007 has been more severe than any other post-World War II period except for a very sharp, and blessedly brief, decline in 1957.

Until recently, rural America had not felt the full fury of the recession because high agricultural commodity prices were muting expected effects. But the prices farmers get for their products have fallen. For example, milk prices in Wisconsin (the dairy state) have declined from $18 to $22 per hundredweight (100 pounds) in 2008 to between $12-13 in the spring of 2009. This is below the breakeven point of $14 to $16. On a larger scale, world trade numbers are expected to decline this year for the first time in a quarter century. This is critical to rural America since one-fifth of all U.S. farm production is exported.

Rural economic problems are not all found on the farm, however. In fact, farming-dependent rural counties did fairly well on the job front through most of 2008 when urban centers experienced a sharp economic decline. In recent months, however, rural jobs have been disappearing at an alarming rate. A recent Rural Economic Update issued by the Rural Policy Research Institute reveals that, according to seasonally adjusted employment data from the Bureau of Labor Statistics, nonmetropolitan counties have now lost 3.4 percent of their jobs as of January 2009 compared with a 2.8 percent drop in metro counties.

As the report summarizes, “Rural factories have been especially hard hit. Rural areas dependent on manufacturing have now lost nearly 5 percent of their jobs since the recession began, as compared with around 2 percent in other parts of rural America.”

So, where is the light? To start with, some 1,000 lawyers per month have lost their jobs since the beginning of the year. Surely, fewer lawyers must be good news. (In the interest of full disclosure my wife is a lawyer and she also thinks my wit somewhat lacking.) More seriously, there are a few signs that we are reaching a bottom. After hitting a bottom in March, equity markets have rallied in recent weeks. Even more surprising, consumer spending jumped by 2.2 percent in the last quarter according to recent numbers. Moreover, April’s overall job loss number, while still high, was below expectations and the lowest in six months.

Some of the more intriguing signals are found in a recent uptick in confidence expressed by U.S. citizens. In a recent Washington Post-ABC News poll taken between April 21-24, half of all respondents felt that the country was going in the right direction. While not an overwhelming endorsement of future prospects, the results are a dramatic improvement over sentiments displayed last October when some 90 percent of respondents felt we were going in the wrong direction. When asked specifically about the state of the economy over the next 12 months, some 55 percent were optimistic, a jump of 7 percentage points in just two months. Most respondents now feel that this downturn is a normal economic downturn than something more dangerous and intractable.

Among so-called experts, there is a collective sigh of relief that we may have avoided the big one, that this will be a recession and not a depression. Much pain remains and much can still go wrong. Jobs are still disappearing. Companies, such as carmaker icon Chrysler, are still going into bankruptcy court. State taxes declined by some 5.6 percent in the last quarter of 2008 and will not recover for some time. Ballooning federal deficits also will present challenges for years to come. And sudden, unknowns like a Swine Flu pandemic (the H1N1 virus) may yet halt the flow of people and commerce on a worldwide scale. But, for the moment, the sense of panic is abated.

If that really is light we see at the end of the tunnel, perhaps the crisis itself was overblown. I think not. Consider the following. The historical average price-earnings ratio for equities is calculated to be a little over 16 (where the price of a stock is 16 times earnings). At the onset of the Great Depression in 1929, it was roughly twice that level, standing at 32.6. In 1999, that same index stood at about 44, clearly suggesting an unsupportable speculative bubble in the equities markets and possibly another economic crash of historic proportions.

If such a bubble existed a decade ago, why didn’t the economy collapse then? Essentially, we buried our head in the sand and delayed the inevitable, but in a very dangerous way. We rode a housing bubble through 2006 when the median price of a house hit 200 percent of the historical, inflation-adjusted standard. By way of comparison, that metric was only about 10 percent above the historical standard as recently as the mid-1990s. We also delayed the inevitable through easy credit and excessive spending. Household debt jumped by almost one-third over the past decade (much higher than the increase in government debt) while the savings rate collapsed to zero. We were spending everything we had and could borrow.

That was not sustainable. If the reckoning does turn out not to be as bad as it might, it still remains a wakeup call. As the saying goes, every crisis is also an opportunity. Perhaps we can use this crisis to get our fiscal house in order. If we don’t we may not be as lucky the next time.

Tom Corbett has emeritus status at the University of Wisconsin-Madison and is an active affiliate with the Institute for Research on Poverty where he served as Associate Director. He has worked on welfare reform issues at all levels of government and continues to work with a number of states on issues of program and systems integration.

Opinions expressed in this column are those of the author and do not necessarily reflect the views of the Rural Health Information Hub.

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Back to: Spring 2009 Issue