Many economic sectors don’t have much more room to fall
By Neil Irwin,
The U.S. economy has been through a lot in the past few months — an unprecedented downgrade of the government’s credit rating, a debt crisis in Europe that threatens to spread across the Atlantic, and a steep decline in financial markets. Yet most economic indicators have pointed to continued, albeit slow, growth.
It isn’t the resilience of the U.S. economy. Rather, it’s a sign of how bad things have already become. Many of the key sectors that usually cause economic contraction, including housing and durable goods such as automobiles, are already at such low levels that they don’t have much more room to fall.
Businesses that cut vast numbers of workers during the recession between 2007 and 2009 are operating with such lean staffing that they don’t have much room to cut. And consumers are already pinching pennies so tightly that they can’t pull back further without cutting into basic necessities.
A recession is still possible. If consumers and businesses were to suffer a sudden shock, such as a major national default in Europe, the U.S. economy could abruptly reverse. With the United States producing about $15 trillion a year worth of goods and services, there’s plenty of room to cut back.
But recent reports about economic activity — in contrast to surveys that measure Americans’ attitudes about the economy — are not pointing to recession.
“I continue to stick to my guns that we’re not going to fall backward into a recession,” said David Crowe, the chief economist at the National Association of Home Builders. “It’s just hard to figure out how you can get much lower than we are already.”
It is the simple math of recession. Consider housing, which is typically a major factor in recessions. At the peak of the last boom, Americans were spending $813 billion a year on residential investment. That figure bottomed out last year at only a $327 billion.
In other words, a major part of the story of the economic downturn was of half a trillion dollars in spending on new houses and apartment buildings vanishing from the economy.
Since hitting its low ebb, residential investment spending has rebounded only slightly, to a $336 billion annual rate this past spring. That means that, mathematically, it would be impossible for a new housing downturn to be as powerful an economic drain now as it was over the past several years; there isn’t $500 billion worth of housing activity left to vanish. Even if housing investment fell back to its low point from last year, that would subtract a trivial $9 billion in economic activity from overall growth.
The same dynamic applies in other areas. Americans bought more than 16 million cars and light trucks in 2006, before the economic downturn. That fell to about 10 million in 2009. The 6 million fewer cars that were sold that year was another major factor in the economic contraction, costing hundreds of thousands of jobs at automakers and their suppliers.
But auto sales have rebounded to only about 13 million a year, meaning that there is not as much room to fall if waning consumer confidence again leads Americans to become ultra-cautious.
A significant factor behind recessions are shifts in demand for major, long-lasting purchases, such as automobiles, furniture and household appliances. In the last recession, sales of those durable goods fell 13 percent, and consumption of nondurable goods — food and clothing, for example — fell less than 4 percent.
In the corporate sector, meanwhile, executives say they’re deeply worried by the turmoil in the financial markets. But businesses have adjusted in the past few years in ways that make them less likely to undertake the kind of mass layoffs that were widespread in 2008 and 2009.
“Since the onset of the recession, companies have been focused on improving their balance sheets, deleveraging, and increasing productivity,” said Tom McGee, managing partner of Deloitte Growth Enterprise Services, which surveys chief executives of mid-size companies nationwide to gauge the outlook. “We’re not seeing signs that there are mass workforce reductions on the way.”
Moreover, the corporate sector’s financial situation is by many measures stronger than it was before the last recession, meaning companies are less likely to be forced to cut workers to stave off bankruptcy. Non-financial U.S. businesses have $15 trillion in cash or investments that could easily be converted to cash on their books, up from $13.7 trillion in 2007.
“The economy is not primed for a recession in the sense that before you fall into recession, there’s usually a lot of excess, which means if you have a shock, businesses respond quickly by slashing inventories and cutting workforce and investment,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch. “But they’re running so lean right now that there’s not that scope to cut.”
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