So much for Tom Hoenig’s message of hope.
On Wednesday, the president of the Federal Reserve Bank of Kansas City told Colorado lawmakers that things may not be as grim as the media is reporting.
“I don’t see evidence that we’re going into a recession,” he said.
Sure, foreclosures keep rising, manufacturing is slipping, the subprime-lending fiasco has turned into a global credit crunch, Canada’s loonie is suddenly saner than our dollar, and the stock market is eroding faster than Rudy Giuliani’s presidential bid. But employment, business investment and other key indicators remain strong.
What else is Hoenig going to say? If he had fully concurred with the sentiments that drove the Dow down another 300 points Thursday, well, the Dow may have dived a lot deeper.
Right now, what the economy needs is a cheerleader, and that’s what the Fed does best — besides lower its interest rate — in times of great distress.
This is not to suggest that Hoenig’s presentation was sheer boosterism.
Economics is the dismal science. Its prognostications are as vague as the notes inside fortune cookies. Economists can’t predict the future because they can’t even predict the present.
Recessions, after all, are declared postmortem. If we are in one right now, it might not be officially declared until after months of data revisions.
Yet one thing seems clear: Growth is slowing. Even Hoenig acknowledged that in his economic-outlook forum sponsored by the Colorado Bankers Association. But no one knows how much it’s slowing — and maybe we’re reacting with too much fear.
That was Hoenig’s point for those of you who were confounded by his “No recession yet” comments in The Denver Post on Thursday, beside all the other reports of rampant recession fears and continued shocks to Wall Street.
“If you get a degree in economics, you should also get a degree in psychology,” Hoenig said, warning of “self-fulfilling prophecy.”
Hoenig, however, did not sugarcoat everything.
“Consumer debt as a percent of (the nation’s gross domestic product) . . . and as a percent of income for the consumer . . . is as high as it’s been,” he said.
We also have a negative personal-savings rate. In other words, Americans are mostly just saving credit-card statements.
This is perhaps the most dismal sign of all since consumers are responsible for more than 70 percent of the nation’s economic activity. And what began as a rash of subprime- mortgage defaults is swiftly expanding into rising credit-card and auto-loan delinquencies.
“The debt that the consumer is carrying right now can be serviced,” said Hoenig. “But there is still an absence of savings. Therefore, the cost of capital . . . will increase . . . over time. And as the cost of capital increases, our ability to bring investment forward is decreased.”
Baby boomers are starting to retire. The working generation behind them is half the size. Amid this generational shift, there’s only one way Americans can maintain their standard of living.
“Each unit of labor has to produce more output,” Hoenig said. “And the only way that can happen is with investment.”
Horns of a dilemma
This is quite a fix we’re in: No savings, no investment, no productivity gains, no more flat-screen TVs for you. The $9 trillion national debt isn’t helping, either.
“The consumer has to begin saving,” Hoenig said. “Now, that’s easy for me to say. . . . Can we do it overnight? No. Because if the consumer suddenly decided to save 10 percent . . . what happens to consumption in the United States? It drops off dramatically. Inventories build, and this slows down the economy.”
It might even cause a recession. But a negative savings rate could cause one too. Hoenig has not lost his optimism to this economic dilemma, though.
“It took us 15 to 20 years to get to this point,” he said. “It will probably take us more than a decade to raise slowly, consistently, the savings rate. . . .
“It can be done. We’re a great country. We find solutions. But it will not happen on its own.”
And, this is just my guess, but it also won’t happen before the next recession.
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to him at , 303-954-1967 or alewis@denverpost.com.
