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Economist dissects recession, looks at future

November 18, 2010

FORT WAYNE — Does a dead cat bounce? Economists would say yes, but not because they tried it with a real cat.
The theory is that if you have a live cat and a dead cat and you drop them both off a building, the dead cat will bounce higher than the live cat. Or, the longer and deeper the recession, the stronger and more robust recovery there will be when it hits bottom, as opposed to a shallow recession with a shallow recovery, or the “live cat.”
The problem in our current economy, according to economist and professor, Dr. Edmond J. Seifried, is that the dead cat bounce is missing. Seifried spoke at a breakfast hosted by Star Financial at Ceruti’s in Fort Wayne last week. He clarified his point using the example of the Great Depression when unemployment was 24.9 percent. One year later, it “bounced” back up to 15.4 percent. The bounce, in every subsequent recession has gotten smaller and smaller. Our recovery is smaller and our economy is slowly sinking. We need growth of 2.5 percent to begin creating jobs and capital. In the last year, unemployment growth has been less than 1 percent, according to the Bureau of Labor Statistics’ (BLS) Employment Situation Summary released Nov. 5.
The recent recovery experienced was fueled by inventory build-up and stimulus spending — both of which are unsustainable. Americans have a “regular uncertainty” regarding their job and financial situation which leads to tax worries and a “basic change in how people view their lives,” Seifried explained. A negative wealth effect is in place where people are saving the same amount they would have been spending in a more robust and less worrisome recovery.
So who is to blame? Seifried started with himself, as a professional economist. He added to the list unscrupulous mortgage bankers with interest only, extended amortization, negative amortization and pay option loans; ineffective financial assistance as in the AIG bailout, described by Seifried as “one of the biggest disgraces” resulting in a $120 billion taxpayer-paid bailout; greedy home buyers; rating agencies like Fitch, Standard & Poor, Moody; the Federal Reserve and especially Federal Reserve Chairman Ben Bernanke, called a “moral hazard” by Republican Congressman Jim Bunning of Kentucky.
Seifried also discussed six measures of unemployment, developed by the BLS and found on their website, that more accurately describes the who and why of the unemployment rate (commonly identified by U3—the official unemployment rate).
U-1 — Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U-2 — Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U-3 — Total unemployed, as a percent of the civilian labor force (official unemployment rate)
U-4 — Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U-5 — Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force
U-6 — Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force
The last measure, U6, is most accurate to describe unemployment in the U.S.
Seifried concluded with the following: Housing market must improve, trade deficit must narrow, negative wealth must turn, consumer confidence must be restored, unemployment must move from 9.6 down to 5.6 percent, government debt growth must stop, and the interest rate must return to normal—between 5 and 6 percent.
Listeners left with a better understanding of the current economy and perhaps some ideas for how to change their own business practices to account for what Seifried discussed.
His final comment was another comparison (a little more palatable than the dead cat): “Trust the U.S. economy. (It’s) like the human body — leave it alone and it will get better on its own.”

 

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