US economic downturn would claim victims across globe
CLEVELAND (MarketWatch) -- Every recession is different in nature and a recession in the near future in the U.S. - though it appears hardly likely at the moment - would claim a different set of victims than recessions in the past.
A severe downturn - a recession is conventionally defined as two consecutive quarters of declining output - would affect a broad set of industries and people, including: union workers, home builders, recent home buyers, Chinese companies and their employees, along with investors in energy stocks and securities from developing countries.
It is important to note that many economists think the U.S. is in a lengthy period of expansion that will last another five years or so. Most also expect the global economy to grow strongly in the years ahead, as emerging market economies such as China continue to expand.
But the U.S. economy has in recent years been a key driver of global growth, and a sharp downturn would certainly have an impact around the world.
Among the factors that could push the U.S. economy into a downturn: The Federal Reserve could fail in its effort to slow the economy just enough to relieve inflationary pressures without triggering a recession.
In fact, most of the Fed's major credit tightening moves in the last sixty years have ended in recession, often because an energy crunch, war or terrorist attack occurred just as the Fed was at a delicate stage in the interest raising process.
Possible triggers for a recession next year, besides a miscalculation by the Fed, include an oil supply interruption, a precipitous drop in inflated home prices, or a crisis in foreign confidence that slowed the inflow of investment dollars the U.S. has come to depend on, driving long-term interest rates sharply higher.
"What the shock might be next time is unpredictable," said Richard DeKaser, chief economist with National City Bank in Cleveland, making a forecast of the timing and shape of the resulting recession unpredictable.
One sure bet: if there is a recession in 2007, it won't look just like the last one, or the one before that. And it would claim a set of victims quite different from the past.
The recession of the early 1980's, the nation's last really severe downturn, hit Midwest manufacturing particularly hard, giving rise to the Rust Belt designation as aging smokestack plants shut down and people left the region to find work.
The next recession in 1990, was quite mild for most of the country. But it clobbered many thrift institutions, requiring a massive Federal Government bailout to prevent a dangerous financial meltdown.
And the latest recession at the beginning of this decade was particularly tough on telecommunications and electronics companies - and on millions of investors who bought stocks in the speculative boom that preceded the bursting of the market bubble.
Impact Felt Across The Globe
Traditional U.S. companies in the midst of restructuring would be particularly vulnerable if a recession occurs next year, said Raj Aggarwal, Firestone Chair of Corporate Finance at Kent State University's Graduate School of Management, Kent, Ohio.
Domestic auto manufacturers and their suppliers are the most prominent examples, Aggarwal said, but they are far from alone. "Technology today makes it more efficient to outsource many of the things done internally by traditional companies," he said, and those companies are saddled with legacy costs for health care and other employee and retiree benefits.
A recession in 2007 would catch General Motors (GM) and Ford Motor (F) in the midst of a desperate effort to downsize and slash operating costs without wiping out their shareholders through bankruptcy filings. Their troubles could be exacerbated by strikes as unions tried desperately to protect members from sharp wage reduction and loss of benefits.
As sick as they are, the GM and Ford produce well over 40% of the nation's cars and light trucks, and bankruptcy filings would wound thousands of shareholders, workers and suppliers, as well as banks and communities.
Chinese manufacturers accustomed to rapidly rising exports to the U.S. would be hit hard if exports to the U.S. suddenly leveled off or declined.
"And companies in Europe, Latin America and other areas would feel a lot of pressure as Chinese companies sought new markets for their exports," Aggarwal said.
It's impossible to predict how many Chinese workers would lose jobs. However, Chinese companies probably have built huge inventories of materials because of worry about shortages. They could be clobbered the way U.S. manufacturers were in the recession of the early 1970s, which followed a period of materials shortages and soaring materials prices.
Metals and other materials prices could drop sharply, depressing stocks of producers in developing countries. Also, if oil demand dropped simultaneously in the U.S. and China, two leading importers, oil prices could collapse. That probably would trigger a painful drop in energy stocks.
However, "we'd regard that as a tremendous buying opportunity," said Arvind K. Sachdeva, a managing director, senior portfolio manager and stock market strategist at Victory Capital Management Inc., the asset management arm of KeyCorp (KEY), Cleveland. He's bullish about the long-term outlook for energy and assumes oil prices would rebound as the recession ended.
The whole U.S. housing sector - from homebuilders and related building materials and service industries to recent home buyers - is cited by many observers as the most vulnerable U.S. economic sector.
Home prices in much of Florida, parts of California and other states along the East Coast and Southwest could drop fairly sharply.
Some economists think the blow would be tolerable because most people could stay in their homes and wait for price recovery. Others think as much as 40% of U.S housing is extremely over valued and vulnerable to major price decline. Inventories of unsold homes are at near record highs, and a recession often quickly turns a modest surplus into a huge overburden that drives down prices.
A home price decline could further slow the rest of the economy, said Aggarwal, "because people are spending their houses these days" by re-mortgaging or taking out second mortgages to pay off credit cards or make major purchases.
However, the danger of a massive collapse of consumer spending is less of a threat than some economists think, according to National City's DeKaser, because consumer savings probably are higher than the dismal initially-reported numbers suggest. "Compared with initial reports, the savings rate has been revised upward for 37 of the 40 years between 1965 and 2004," he said.
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