Wednesday, July 30, 2014
Inquirer Daily News

U.S. economy remain in free fall

Economists at IHS Global Insight paint a grim picture of a deep recession and concerns about the recapitalization of U.S. banks.

U.S. economy remain in free fall

When I hear reserved economists say something like “the U.S. economy is in free fall right now,” I brace for impact.

That was the message from IHS Global Insight yesterday as it provided an overview of our diving economy and the struggles to find the rip cord.

The Lexington, Mass. economic forecasting firm sees gross domestic product declining 6 percent in the current quarter, making it the worst part of a recession that began in December 2007.

The preliminary estimate for GDP in the fourth quarter was a negative 3.8 percent, although IHS Global Insight expects that to be revised to 5.2 percent.

More troubling was the math regarding how much capital banks will need this year to offset their losses. Chief U.S. financial economist Brian Bethune estimates the number to be $250 billion to $300 billion.

Based on the priorities laid out by Treasury Secretary Timothy Geithner on Tuesday, the new Financial Stability Plan is expected to provide a maximum of about $120 billion. So our bank recapitalization efforts seem to be at least $130 billion short.

And if federal regulators were to make the consequences of seeking public capital so unappealing that bankers shun it, what then? A string of bank failures by undercapitalized institutions?

“Capital depletion in the banking system is problematic,” Bethune said. “Banks have to have capital in order to support lending.”

Regarding the $789 billion economic stimulus plan, IHS Global Insight said it will help make the recession less deep. Chief U.S. Economist Nigel Gault said that without the stimulus GDP would be 1 percent lower in 2009 and 1.8 percent lower in 2010.

Want some glimmers of hope? Well, the ISM Manufacturing Index turned higher in January for the first time since August, and the ISM Non-manufacturing Index rose in January for the second straight month.

But that doesn’t mean the turnaround has begun. “All we can hope for is the rate of decline is slowing down,” Gault said. The real economy indicators of employment and industrial production “are still deteriorating extremely rapidly,” he said.

Mike Armstrong Inquirer Columnist
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Mike Armstrong Inquirer Columnist
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