The worst economic catastrophe in the history of civilization was the Dark Ages which spanned over 500 years, from 450 to 1000 A.D. The second worst was the Great Depression, which fortunately didn’t last as long but was still devastating, from 1929 to 1941.
And the third worst economic nightmare since the beginning of civilization? We just lived through it: The Crash of 2008.
The U.S. is still struggling to recover. That’s despite the fact that the stock market keeps hitting record highs, unemployment is down (5.8%, the lowest since 2008), 200,000+ jobs per month have been created over the past year, GDP is over 3%—these days, good news keeps a-comin’.
The problem is that most folks aren’t feeling the recovery. Many have debt and are struggling to make ends meet. If they are working, their wages have been stagnant for at least the last six years.
Credit Still Very Tight
The crux of the problem is this: Banks are not really lending. Banks lending hasn’t been truly significant since The Crash Of 2008. After The Crash, banks tightened credit particularly for small businesses and potential home buyers, as shown in this Small Business Administration (SBA) chart:
Even now, outstanding credit is still required to get a bank loan. Understandably, lending was constricted after The Crash, and there has been no real loosening since then. I believe banks will start lending again—that is, doing what they’re supposed to be in business to do—when the Federal Reserve starts raising interest rates from its current 0%, where it has been the last ten years, to at least 3%. The first rate hike is widely expected to take place late in 2015.
A Fall Hike
Federal Reserve meeting in 2014 to discuss the fate of the world
I am hopeful that rate hikes will begin as soon as possible, because this should accelerate the recovery and get the economy revved up at last, leading to a “tangible” recovery. With banks paying higher interest on depositors’ money, citizens will be enticed to put their money in savings accounts. That would cause a few things to happen:
- With depositors getting a better return on their savings, they’ll be inclined to put even more money in bank accounts, which would increase the banks’ reserves.
- With the increased capital, banks will be more inclined to loosen credit and make loans, spurring home buying and small business activity.
- With the extra money from interest, consumers would be able to make more purchases, further propelling the economy.
But there’s now a new factor on the horizon: OIL.
The “New” Wrinkle
Okay, oil is not so new. But the price of crude has been dropping sharply since June 2014, from $115 to the current $70 per barrel and this discounting is likely to continue. OPEC appears to be in disarray, and the Saudis seem uninterested in cutting production for the time being. Of note, the United States has been the world’s biggest oil producer as of July 2014, pulling ahead of Saudi Arabia and Russia. There is now an oil glut.
If the price of crude continues to drop, the ramifications could be impressive. Most industry sectors would see improved bottom lines—especially those industries that rely on trucking or flight. Stellar profits should result in an increase in hiring. If skilled workers then become harder to find, wages would finally jump in order to attract talent. Most employee wages should rise with that tide.
Of course, Americans would enjoy terrific savings at the gas pump. More money in their pockets would result in more consumer spending, leading to economic juice not seen since the 1990s.
Unemployment would fall not just because of increased hiring but because, with gas near $2/gallon, there would be financial inducement for many of the unemployed to get a job to which to drive. That is, when gas was $3.50/gal, it didn’t always make sense for people to sacrifice a huge chunk of a paycheck for fuel expenses in order to drive to a job. Collecting unemployment benefits was a better deal.
Of course, the drop in the price of oil has been hurting the energy sector, especially the oil industry. But if they saved their massive earnings from the boom years, they ought to do just fine during this period of low oil prices, which shouldn’t last more than a few years.
Oil workers would be hurt in this scenario, unfortunately, as those jobs dry up. But after a few years, as oil prices rise again, the industry should see a restoration of jobs.
By the time the price of oil starts rising again – perhaps mid 2017 – the economy could be churning at a fairly high gear, with GDP growth over 3 percent. That said, unforeseen events in the U.S. — and in Europe — could easily delay a true recovery.
The Next 12 Months
In summary, I see 2015 as the turnaround recovery year, IF interest rates are raised at least twice and oil prices remain low. I think both conditions are necessary to begin a true, palpable recovery. That said, here are my hopeful expectations for one year from now (end of 2015):
- Interest rates raised at least twice, to .75 percent
- Gas prices falling to nearly $2/gallon
- Unemployment rate below 5% and dropping
We’ll see how 2015 unfolds.
Happy Holidays to all!
11/27/14
ADDENDUM 12/6/17: Obviously, two things did not happen as outlined here: (1) The Fed did not raise its rate to 3%. In fact, as of this writing, it has languished at 1.25%, with an expected raise to 1.50% in the coming weeks. (2) As a result, the true recovery did not take place and wages are still stagnant.
Excellent, insightful article.