The sub-prime lending challenge and global credit crunch are in full swing. The economy, which has typically grown 3-4%, is now in low gear at 1-2% growth. As the economy slows down it will be interesting to see if employers attempt to retrench and layoff workers, which normally occurs. Watch the unemployment rates for increases, particularly October through March. This holiday season will be a key period for direction in the economy.
This cyclical downturn is usually followed by a cyclical recovery. That is, employers return to normal and business increases; they retrieve workers and most workers return to old jobs.
However, be aware that a new process is taking place in the economy: the transitional recovery. That is the downtime when old employers close or down size and try to consolidate, outsource and automate.
In the transitional recovery, new businesses and employers appear and are in recruitment of employees. The workers encounter different jobs with new skill sets. Many are required to switch careers and employers. This requires individuals to relocate or employers must adopt new systems in workforce management. For example, employees may be able to work from home or locations remote from the business.
One of the economy dynamics that could by problematic in the downturn is savings rate and debt servicing ability. Debt service as a percent of income was slightly above 16% from 1993 to 1994. This figure has increased to nearly 19% as consumers binge with credit cards, based upon home appreciation.
The saving rate excluding 401K and other retirement contributions was nearly 8% in 1992 and is now -2% – the second year in a row the household was in the red zone. Compare this to the last major recession in the early 1980s; this percentage was approximately 12%.
The bottom-line is that the American consumer has little wiggle room and will be in trouble should a major downturn occur. The majority have maxed their credit and have little in savings to draw from. Those who saved and maintained manageable levels of debt will be in the driver’s seat!
Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.