After four quarters of decline in the biggest economic downturn since the Great Depression, the US gross domestic product, GDP, reversed itself, growing at 3.5% the third quarter. When the news was released yesterday, the Dow Jones Industrial Average shot up 200 points. Happy days are here again. Break out the credit cards for Christmas. Whew – we’re glad that economic mess is finally behind us. We can focus instead on the World Series.
Not so fast, let’s look deeper:
What actually is the definition of GDP? It’s the total of all goods and services produced in a country, specifically, consumer, investment and government spending plus exports, less the amount spent on imports. It’s a handy snapshot of how an economy is doing but doesn’t tell the whole story. For example after a natural disaster, the GDP goes up because money is spent on repair while no value is allocated in the GDP formula for damaged assets.
A recession is usually defined as a contraction in the GDP for six months. One additional factor that has made this recession severe was that it also included a financial crisis.
All is not well economically. There are other factors to consider when assessing where we are now:
- Sales of new homes fell 3.6% in September. Most analysts blame the decline on the pending expiration of the first time home buyer’s tax credit.
- According to the Mortgage Bankers Association the demand for mortgages has slowed in the past three weeks.
- The consumer confidence index unexpectedly fell from 53.4 in September to 47.7 showing that consumers are less optimistic about the economy, poised to spend less in the months ahead.
- GMAC, the auto financing company, is trying to pry another $5.6 billion dollars from the federal government to raise bill owed the taxpayer to $18 billion. The public now own more than a third of the company. GMAC keeps losing money, but claims it is too big to fail. Losses for the first half of the year were $4.6 billion.
- October’s unemployment figures won’t be out for a while, but September’s climbed nationally to 9.8% with more than 15 million jobless. Michigan is the the hardest hit state with unemployment at 15.3%. Fourteen states have rates in double digits. Job losses are expected to climb until employers resume hiring in the second half of 2010, just before the mid term national election.
- In the third quarter, consumers saved 3.3% of after tax income less than the 4.9% they put aside in Q2.
- Consumers remain mired in debt while credit standards have tightened.
- In commercial real estate, the massive real estate financier Capmark Financial Group declared bankruptcy last Sunday. In just one market, Los Angeles, vacancies in commercial real estate rose above 17% in the third quarter, compared to 13% a year ago. Asking prices for business leases are still declining.
- Holiday sales are predicted by most analysts to show no growth compared to last year’s down season which had declined from 2007.
So what does all this mean for the distressed homeowner?
First, take heart from the good news. The worst is behind us. In the depths of this recent economic downturn, there was the real risk that a misstep could have precipitated a second depression. We seem to have avoided that fate.
Secondly, put yourself on a budget and stick to it. We naturally want to indulge ourselves after a period of denial, but now is not the time. Make a clear distinction between spending on wants and needs.
Finally, put aside a cash cushion. In the past decade homeowners have counted on appreciation in home value to increase their net worth. Home values are stabilizing. Appreciation is beginning anew, but as a homeowner you can no longer rely on a home equity line of credit to cover unexpected expenses. You need access to cash specifically allocated for emergency expenses like paying for health insurance, a car repair, or a mortgage payment.