Friday, October 9, 2009

Economist Speaks to Multi-Chamber Luncheon Hosted by the Wilsonville Chamber

While the economic downturn draws to a close, one question still looms: How fast will our economy recover?
Article by Patrick Johnson
Re-printed from the Wilsonville Spokesman

Noted economist John Mitchell, a former economist for U.S. Bancorp, and a professor at Boise State University, addressed this topic to a crowd of more than 150 at the monthly Wilsonville Chamber of Commerce luncheon series last week.

“We won’t know for several years how long the recession is,” Mitchell said. “But the bottom line is that it is drawing to a close – I think that’s the most likely scenario, is that we are about there.” New economic indicators were expected this week, but Mitchell feels the worst of the economic downturn will be over by the end of next month.

“Four of five months ago there wasn’t a lot you could point to,” he said. “But now building permits are off the bottom, inventories are coming down. Look at the motor vehicle business, their inventories are depleted, so what do they have to do? They have to make more cars. Industrial production rose in July for the first time since … the recession started. … All those leading indicators are pointing toward rebound.”

Mitchell said employment growth lags after the economy rebounds, so it will be a while before there is significant job growth.

“That’s when people are going to feel better about it, and that’s going to be a while,” he said. But how will the economy rebound? Mitchell said there are several ways the economy can grow. “A ‘V?’ Is it going to be a quick down and a sharp up? That’s what normally happens after a quick recession, but I don’t think that’s going to happen this time,” he said. “Will it be a ‘U’ shape, where we linger down here before starting up? Will it be the dreaded ‘W,’ a double dip, start out, back down, then back up. Nobody knows.”

Mitchell said he felt the rebound would look like the letter L, where the economy drops suddenly and then grows slowly.

“The economy is not likely to play its traditional role,” he said. “You have that saving shortfall that has to be filled, credit markets are getting better but not like they were. I think that’s the most likely scenario. But again, there is a great amount of uncertainty here.”

Mitchell reminded the crowd of a good economy for the past 25 years, so it isn’t surprising the downturn happened.

“Remember, the last serious recession prior to this one ended in November of 1982,” he said. “So between November 1982 and the end of 2007 there was recession basically 5 percent of the time. There are a significant number of people who have never seen a significant business cycle in their lives until this one.”

Mitchell pointed out that this week would mark the first anniversary of the Lehman Brother’s failure and the AIG bailout. “What an exciting anniversary!” he said to a crowd that broke out into nervous laughter.
According to housing data, Mitchell said the decline in the housing markets “seems to be over” and that Oregon is ranked 47th in the country in job growth. “But, hey, we are ahead of Michigan, Arizona and Nevada,” he said. According to national data, he said North Dakota is ranked number one. “Bismarck or bust!” he said.

From December 2007 to March 2009, household net worth dropped from nearly $63 trillion to just more than $50 trillion. Mitchell said many of the recessionary cycles are based around housing starts. This recession is no different.

National data shows that at the peak of the economy in 2005, there were 2.3 million housing starts per month. At the bottom of the recession in January, there were only 500,000 starts nationwide.

“Bottom line, that equity spun out over that time period, house value have gone down — a tremendous decline in net worth,” he said. “Now, the importance of that is what are the implications on spending down the road?”

In addition, he said, Oregon’s leading production of lumber and wood products has been adversely impacted. “There are a lot of new issues out there. How is this new system going to work? ” he asked. “I would love to be a fly on the wall in the next Chrysler negotiations, with (the United Auto Workers union) on both sides of the table – how is that going to work? Besides being a chamber of commerce luncheon, this is a GM shareholders meeting. Think about that.”

Mitchell questioned how the government will handle its fiscal policy moving forward.
“How do you unwind it, and when do you unwind it,” he said. He pointed to 1937 when policy makers hurt the economy by pulling stimulus out too early. But he also said the inverse was true, as when Kennedy-Johnson tax cuts in 1966 and 1967 combined with the Vietnam War and the Great Society programs led to increased inflation, but policy makers didn’t pull the tax cuts out in time. That resulted in high inflation in the late 1960s and 1970s. “It’s a very tricky thing that policy makers are going to have to do,” he said.

The lunch topic attracted a wide-range of people from the region, including Oregon Senate Majority Leader Richard Devlin, state senator Martha Schrader, state rep. Matt Wingard, Metro president David Bragdon, Clackamas County Sheriff Craig Roberts and Alan Kirk, Wilsonville city council president.

It was an event that included the Wilsonville, West Linn, Canby, Sherwood and Tualatin chambers.

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