Norris says ‘we’re in a recession’; proves it; says we’ll come out other side

Splitting no hairs along the way, last week’s chamber breakfast speaker John Norris made three blunt points: we are in a recession, we have been in a recession for the better part of the year, and it’s likely to get worse before it gets better. Norris is managing director of wealth management and investment services at Oakworth Capital Bank in Birmingham.

Norris cited a number of economic indicators documenting the extent to which the economy is struggling. He said Gross Domestic Product showed negative growth in the third quarter this year and will undoubtedly show greater negative growth in the fourth quarter and perhaps beyond before it recovers.

The manufacturing index for the current period is 38.8, which he said is the lowest since the recession of the early 1990s. The consumer confidence index is currently at 38, compared to figures as high as 120 to 130 during the high flying years of the mid- 90s. Sales of new vehicles in October was the lowest since the recession of 1980, he said.

Other figures cited:

• Commercial real estate (private structural investment) increased 7 percent, but that figure is down from 17 percent for the same period last year.

• Residential real estate sales have decreased by 19 percent.

• Manufacturing equipment expenditures are down 5.5 percent.

• Durable goods expenditures (cars, appliances, business equipment, furniture, housewares, etc.) are down 14 percent.

• Non-durable goods (food, clothing, plastics, textiles, office sup- plies, paper products, etc.) are down 6 percent.

Moving to government tax policy, Norris said tax increases such as those discussed by candidate Obama during the presidential campaign would be disastrous at a time when what is needed is economic stimulation.

“There’s no way Obama can keep his campaign promises on raising taxes,” he said. “He can’t increase capital gains taxes, corporate taxes, estate taxes, as he proposed during the campaign.” Norris said he believes Obama’s advisers have by now already convinced him of that reality.

Debt, lack of savings a drag on economy

Norris said that consumer debt has grown to the point of crippling the economy by itself, with household debt as a percentage of Gross Domestic Product skyrocketing from 44 percent in 1972, to 81 percent in 2002, to over 100 percent in 2008.

He said 33 percent of all U. S. government debt in 2000 was owned by foreign investors; 55 percent of government debt was owned by foreign investors in 2008. China alone now owns 11.2 percent of all U.S. Treasury debt.

He made two points related to those numbers: U.S. treasury debt is now siphoning off investment from the stock market itself, and when that debt is repaid, it is being repaid, not to U.S. citizens, but to foreign investors.

Norris said that in the face of increasing debt, the national household savings rate has shrunk to 0.6 of one percent, compared to the 10 percent rate recommended by most economists for family saving.

“We have to get control on spending, both at the national level and the level of individual households. For us as consumers, this means doing without things that your grandmother could never have imagined having in the first place,” citing cell phones, iPods, wall-sized flat panel TVs as examples of such consumer products. He added that personal savings must be restored to a reasonable level for the economy to regain a healthy footing.

Economy resilient, will recover

Ending on an optimistic note, Norris said he is confident the economy will stabilize after a matter of months and then recover because of four factors that have always characterized the U. S. economy:

• the historic and continuing productivity of the U.S. workforce

• the entrepreneurial spirit that is the economy’s foundation

• the essential amiability of the government to free enterprise and a generally sound instinct for restraining its worst miscarriages via regulation

• the ability of the markets and financial system to generate capital necessary for growth and expansion.

Norris took several questions from the audience including one from Becky McMillian, which he quoted in later in his own newslettter. This sense of the question, if not the exact wording was this: “My husband and I run a small business (McMillian Fabricators) and we have a hard time making ends meet – as hard a time or harder than all these banks and big financial institutions they’re bailing out. I resent them bailing out all those rich firms that have made bad decisions. That’s our money they’re bailing them out with. Why don’t they take all those billions and give it to the small businesses and common people so they can pay their bills and their mortgages and meet their payrolls and keep their workers employed and then you won’t have all the problem with defaults on loans and layoffs and everything else that’s going on?”

“I’ve never been a preacher,” Norris responded, “but I have been a deacon, and to that comment I can only add ‘Amen.'”

Ending on an optimistic note, Norris said he is confident the economy will stabilize after a matter of months and then recover.