By Scott A. Heintzelman
Recently many clients and friends have been asking me what I think of the economy, recessions, who is to blame... and when will it get better? I usually tell people this mess we are in did not happen overnight; one thing did not cause it; it will take a while to get out from under it and there is much blame to pass around. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
How did we get here? It has a lot to do with greed and people not wanting to have delayed gratification. Politicians from both parties tend to focus only on short term results. This is one reason I believe strongly in term limits. If I were King for a day and could change only one law, it would be mandatory term limits. I suspect that most politicians intend to do well when they get elected, but fall into the trap of trying to stay elected. This often results in a short term view of success and winning votes.
Much of the blame for the subprime mess is on the mortgage originators for lending funds to people with poor credit and high risk of default. Some of this blame should be on the Federal Government, HUD, Fannie Mae and Freddie Mac who so encouraged home ownership that poor decisions were made. As the central banks flooded the markets with capital liquidity, it lowered interest rates, it also depressed risk premiums as investors sought riskier opportunities to increase investment returns. With increasing housing prices, this cycle just started spinning. In 2001 subprime mortgage originations were $173 billion. In 2005 they were $665 billion. That is a huge increase and once the housing market started to slow – well you can see how the default rate would soar. People were buying homes with very poor credit and they should not have done so and certainly lenders should have known better as well.
Add to this mess a country that believed home prices would continue to increase, consumer spending growing, people not saving or paying down debt… well this mess just needed one thing to happen and in reality we had several. Capital markets were freezing due to the subprime mess, home prices falling as inventory of homes became bloated, stock market free falling, presidential election where both candidates focused on the negatives of the economy and blamed the current administration… That is how we got into this recession.
When do we get out? Most economists believe we are two quarters into this recession and probably have at least another two to go. The manufacturing activity report and the light vehicle sales have just dropped off the charts during the past few months. This results in huge job losses and excess inventory. In order to climb out of this recession, we need to work through our excess inventory. This will take some time to get through this built up supply.
Some good news is that inventory of new homes sales is dropping rapidly. Just ask any contractor or supplier in the home construction business and they will tell you very few homes are being built. At some point this inventory will reach the bottom (it cannot go below zero fortunately) and new homes will start to be built. We still are working through the inventory of existing homes for sale inventory and we are at a pretty good level in most parts of the US. However, in certain pockets (Florida, Southern California, Arizona) the inventory level is still very high, which means the recovery will be longer and slower in these pockets.
Overall, I am still exuberant about the economy, the entrepreneurial spirit in our country and believe the government will pass some type of stimulus package (hopefully not one loaded with pork and special pet projects). What this means for organizational leaders is that 2009 is going to be a tough year for most, but probably some time during 2010 we should start to have growth in our economy.
Please contact me and let me know when you think this recession will end and what steps you are taking to manage your organization through these difficult times.