Country beginning slow recovery after recession

By Jessica Legge Borders

FAIRMONT — The recession may be over, but the country has a long, slow recovery ahead of it, David Wyss said.

Wyss, chief economist at Standard & Poor’s, recently provided his outlook for the economy of the United States during the 16th annual West Virginia Economic Outlook Conference.

The West Virginia University College of Business and Economics sponsored the conference, which took place Nov. 11 at the Embassy Suites Hotel in Charleston. The event was broadcast live over the Internet.

“This has been the longest and deepest recession since the 1930s, and ... the ‘has been’ part of it is the good news,” Wyss, who is a well-known speaker on economic topics, told the audience.

Standard & Poor’s believes that the recession is over and that the country has seen the bottom. However, the fact that the United States is at the bottom means that the economy is at its worst right now, and it’s going to take a while for the situation to get better. But Wyss said things aren’t going to plummet any further.

He said the housing market was the big driver of this recession.

“They now seem to be stabilizing,” Wyss said of the housing market. “We’re seeing some extra home sales. We’re actually seeing some positive signs in home building and home sales. The consumer has calmed down … and people are buying again.”

While people are still a bit shell-shocked — not to mention broke — they’re not as scared as they were six months ago, he said. That full-scale panic that existed toward the beginning of the year is gradually going away.

“The last couple of recessions, the world was led into recovery by the American consumer,” Wyss commented, but he doesn’t think the American consumer has the means to solve the economic crisis this time around.

Wyss said the housing problem was very simple — the country built too many homes at too high of a price because housing was cheap. But people are more concerned about investing in a house now.

The solution is to stop building houses in order to get the supply and demand back in balance. Standard & Poor’s expects 570,000 houses to be built this year, which would get rid of a million units of extra supply, he said.

With the low home prices now on the market, sales are starting to pick up. Many first-time homebuyers are taking advantage of these opportunities, Wyss said.

He said in states like Florida and California, a lot of houses were bought as vacation or secondary homes rather than as primary residences, and that’s where the significant foreclosures were seen.

In addition to Florida and California, Nevada and Arizona have had high foreclosure rates. Outside of those four states, mortgage rates are up — but not severely.

“The (Federal Reserve) responded to this by cutting interest rates,” Wyss said. “That’s sort of typical behavior for the Fed. What they then decided to do was shove other interests down.”

While the Federal Reserve built up more than a trillion dollars of securities, it started to retreat from those and recently stopped buying long-term government bonds. He said the Federal Reserve has already cut its balance sheet by close to 10 percent, and has plenty of time to exit before inflation becomes a problem. However, Wyss worries that politics will get in the way of the Federal Reserve.

In terms of the economy, the interest rate at which government borrows isn’t as important as the rate at which private corporations borrow, he said. Markets are now beginning to get their nerve back as far as borrowing.

“It’s going to cost us a lot of money to get out of this ... about 11 percent of U.S. GDP,” Wyss said.“That’s a lot of money. It’s expensive, but it’s doable.”

While people think of the country’s economic situation as a banking crisis, he said the real problem has been with the financial institutions that compete with the banks. Insurance company American International Group (AIG) is a perfect example.

Wyss said this has not only been the deepest recession in the United States, but also the most simultaneous recession seen around the world.

Following Wyss’ presentation, George Hammond from WVU talked about the West Virginia economic outlook for 2010 and beyond.

Hammond, associate director of the Bureau of Business and Economic Research and author of the West Virginia Economic Outlook, said the state will face some rough times in the remainder of 2009. West Virginia will keep losing jobs, but will start to see a little bit of job growth return to the economy during the second half of 2010.

In terms of job loss, the outlook for the nation is worse, he said.

“What I’m looking at is very slow job growth in West Virginia over the next five years,” Hammond said. “Job and income growth sets the stage for West Virginia to grow its population.”

At this moment, West Virginia has been sucked into the same vortex as the national economy, he said. The state has already been through one recession this decade — in 2001. West Virginia managed to stabilize through most of 2008, with the energy boom creating job stability while the national economy was experiencing a severe downturn.

But in 2009, job losses took place in the state, accompanied by a gigantic surge in the unemployment rate.

Hammond said West Virginia has lost 23,000 jobs this year — or two-thirds of the jobs gained during the 2003-08 period.

“The national economy performed even worse in the last year,” he said.

The state’s unemployment has nearly doubled in the past year, but this rate isn’t even close to the peak rate reached in the early 1990s, Hammond said.

“West Virginia, as is the national economy, is feeling a significant downturn, but it’s not as big as the worst downturn the state has seen,” he said.

Job losses are widely distributed across West Virginia’s regions and industries.

Hammond said manufacturing jobs are down 6,000 over the past year and have decreased significantly during the past decade. There is evidence that West Virginia’s manufacturers are finding success in international markets, but that makes them susceptible to global downturns.

Construction jobs are down about 3,000 over the past year, and natural resources and mining employment has seen a drop of about 2,600. In addition, the global downturn has had a big impact on West Virginia’s coal production, he said.

Health care and government are the two sectors that have grown in the past year, but those areas are not totally immune to developments in the business cycle, Hammond said.

According to Hammond, the two engines of job growth in the West Virginia economy have been the Morgantown area and the Eastern Panhandle in recent years. While Monongalia County is continuing to add jobs today, it’s gaining fewer than earlier this decade. The Eastern Panhandle region, however, is losing large numbers of jobs.

In 2008, home foreclosures were concentrated in the Eastern Panhandle.

“The boom markets are getting the worst of the housing correction, but the housing correction is hitting the state on average,” he said. “The boom markets are experiencing the worst of the housing downturn.

“There is light at the end of the tunnel,” Hammond said to conclude his presentation. “We will eventually get there, and the state will start growing again.”

E-mail Jessica Legge Borders at jlegge@timeswv.com.