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Sunday, 28 August 2011

3 Ways the Next Recession Will Be Different

If the second half of 2009 and 2010 were a time of economic recovery, then 2011 has by and large felt like a relapse. Skyrocketing oil prices from instability in the Middle East cut into consumer spending, the prolonged debt ceiling debate chipped away at business confidence and the European debt crisis continues to enrage the stock market.

All of this has only renewed concerns among analysts and average Americans that the U.S. would suffer a dreaded double-dip recession, but according to several economists MainStreet spoke with, even if we do enter into another recession later this year or in early 2012, it won't be nearly as damaging as the Great Recession of 2008.

"If there is another recession, I think it wouldn't be as severe and it would also be shorter," says Gus Faucher, senior economist at Moody's Analytics. "And the reason for that is a lot of the imbalances that drove the previous recession have been corrected."

As Faucher and others point out, banks are better capitalized now, the housing market has shed (however painfully) many delinquent homeowners who signed up for subprime mortgages before the recession and U.S. corporations have trimmed their payrolls and are sitting on ample cash reserves to help weather another storm. At the same time, consumers have gradually improved their own balance sheets by spending less and paying off more of their debt.

That said, another recession wouldn't be a walk in the park for U.S. businesses or consumers since the country would experience a worsening of an economy that is still trying to recover from the first downturn. Any new job cuts, mortgage delinquencies and revenue loss — however mild — would effectively be piled on top of previous losses, making it feel that much more severe.

Fewer Job Losses, but Higher Unemployment Rate

This severity will likely be most evident in the labor market. The country lost more than 8 million jobs across all sectors of the economy during the first recession, causing the national unemployment rate to roughly double from 5% to 10.1% at its worst point. Few if any economists expect job losses this time around to be as significant or widespread, but the major difference is that many of those lost jobs have yet to come back, and the unemployment rate has been hovering around a comparatively high 9% for months.

"Unemployment is not going to double from 9% to 18% now, but it could get up to 10% and maybe more, hitting those highs we experienced last time around," says Paul Dales, senior U.S. economist at Capital Economics in Toronto.

Others like Faucher predict that the unemployment rate could go as high as 11% in a second recession. That may only be a 2% increase from the current situation, but it would represent the highest unemployment rate at any point since the end of World War 2, surpassing the 10.8% rate at the tail end of the 1982 recession.

Initially, many of the same industries that suffered job losses in 2008 and 2009 would experience layoffs again in the next recession, with manufacturing and construction businesses leading the way, according to Mark Price, a labor economist with the Keystone Research Center. But unlike last time, some sectors might escape largely unscathed. In particular, Faucher points to the education and health services industries, which grew in the aftermath of the recession and have a better long-term outlook than most professions.

Different Cities Could Be Impacted

The parts of the country that had it worst during the first recession — housing bubble states like Florida, California and Nevada — won't be helped any by a second recession, but neither will they be the hardest hit. Instead, Dales speculates that it may be cities like Washington, D.C., that are in for an unpleasant surprise.

"One of the differences in this next recession is that there would be less fiscal stimulus," Dales said, predicting that legislators would be less likely to expand government payrolls or pump billions into the economy given the anti-spending climate right now. "So more jobs might be lost in Washington, D.C., which escaped quite lightly during the first recession."

Faucher speculates other cities like New York and Boston may endure tougher times if the stock market were hit hard by the next recession, since these cities are very much exposed to the financial markets. What's more, he argues that the technology industry might experience some turbulence as well, more so than during the previous recession, as investors would have to think twice about funding projects. If so, San Francisco and Seattle could have a gloomy outlook.

A Better Housing Market

While no one can say for sure which factor might cast the final blow the economy, one thing seems clear: it won't be the housing market.

"This will not be a housing-led recession like the last one," Faucher said, and as a result, consumers shouldn't expect to see a drastic fallout in the housing market this time around. "The housing market may bounce along the bottom a little longer and see small price declines, but we are pretty close to an equilibrium."

Housing starts are at record low levels and prices have dropped significantly, meaning the market doesn't have much farther to fall. Once again though, that's not to say the housing market would be unaffected by another recession. According to Dales, the big concern is that a new economic downturn could prompt another round of first-time mortgage defaulters, which in turn would lead to another round of foreclosures.

"It might even be the case that people who are struggling to pay their mortgages now would see another recession as reason enough to stop paying, that they might say they have had enough," Dales said.

Sadly, since foreclosures could take years to process, it could serve as a long reminder of the devastating impact of a recession, even one that is short-lived.

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