U.S. Economy Faces Slow, Gradual Recovery

October 7, 2009 Updated: October 7, 2009

WASHINGTON—Overall, the U.S. economy is showing signs of recovery, despite continued layoffs, business bankruptcies, and defaults in loan obligations.

Close to 260,000 workers lost their jobs in August in mass layoff actions, according to a U.S. Bureau of Labor Statistics release. So far this year, more than 2 million Americans have lost their jobs, and since December 2007—when recession first hit the country—more than 4.5 million people have applied for unemployment benefits.

Unemployment rates as of June peaked at 9.5 percent, the highest since 1994. However, the U.S. gross domestic product (GDP) fell by an annualized rate of 1 percent, much less than the 6.4 percent pace set during the first three months of 2009.

“The American economy continued to weaken during the months of April, May, and June 2009, but it was no longer in free fall. Employment remained on a downward path … But the pace of economic decline also slowed during the second quarter [of 2009],” the Brookings Institution noted in its September Metro Monitor.

Housing Market Recovery Under Way

Defaults in real estate-related loans are leveling off. In July, foreclosure notifications decreased by 8 percent.

Nevada is still the state with the highest foreclosure rates, with an increase of 53 percent in announced foreclosures over August 2008. However in California, another hard-hit state, foreclosure notices decreased by 15 percent in August over the prior month and 9 percent compared to August 2008, according to the Housing Predictor Web site.

Sales figures from new and existing homes have been promising since the beginning of the second quarter. The Housing Predictor expects the real estate market to return to “healthy levels” by the end of 2009 or beginning of 2010.

Amarillo, Texas, tops the list of favorable real estate markets, followed closely by Rapid City, S.D., and Davenport, Iowa.

“North Dakota was never targeted by subprime lenders and banks selling new Alternative Adjustable (ALT-A) rate mortgages during the real estate boom, which has acted to protect it from the disastrous economic conditions elsewhere,” according to the Housing Predictor.

Government Incentives

The U.S. government’s first-time buyer tax credit, rolled out in February, jump-started housing sales. In August, around 1.2 million—or around 30 percent—of all home buyers were first-time buyers. In August, 5.1 million homes changed ownership. Housing inventories fell by 10.8 percent from 4 million houses available for sale, according to the National Association of Realtors (NAR).

The first-time tax credit was created by Congress in 2008, granting up to $8,000 in tax credit to new homebuyers. The incentive is not indefinite and will expire in November 2009.

A number of caveats are attached to this tax credit, including that the house must be a primary residency, located in the United States, not a vacation or investment property, and cannot be sold for three years. Income for single buyers can't exceed $75,000 ($150,000 for couples).

The three year ownership requirement was designed to deter “flipping homes in order to get the credit," states NAR.

Regional Effects of Recession

“Differences in economic performance among metropolitan areas remained stark,” Brookings said in its report. Different cities and regions witnessed varying degrees of economic downturn during the recession.

The recession was rather mild in Pittsburgh, Pa., and its surrounding areas. Pittsburgh’s industries continued to hire until the end of October 2008, with layoffs starting in November. Around early 2009, a total of 16,900 jobs were lost, the biggest job loss since 1983. But Pittsburgh city officials felt fortunate compared to the 140,000 jobs lost in Phoenix, Ariz., a much larger city.

Metropolitan areas that experienced a rather mild recession include Pittsburgh, Pa., Rochester, Buffalo, and Syracuse, N.Y., as well as New Haven, Conn. In such regions, “Job losses paled in comparison to the tens of thousands of jobs lost in [other] regions,” the Pittsburgh’s Future Web site published.

Brookings suggests that Pittsburgh’s relative prosperity was due to its large health care, social services, and higher education industries.

“Pittsburgh’s specializations in higher education and health care, and its steady housing market over the course of the decade, shielded it from the worst effects of the recession. In addition, its specialization in supplying machinery and services to the global steel industry also helped make its economic downturn less severe than those affecting auto industry-focused metro areas,” Brookings researchers said.

To counter the job losses, the architects of Pittsburgh’s Future Web site asked universities to expand cutting-edge research programs, allocate funds to start-up firms, and become more competitive in the marketplace.
The Washington, D.C., metropolitan area also weathered the recession relatively well, as the federal government is the main supplier of jobs in that area.

“The region has a steady base of federal and associated jobs in professional/technical services and many high-wage, high-skill occupations. The labor market is relatively healthy, and gross metropolitan product continues to grow,” according to Brookings.

Auto Industry Feels the Pinch

The U.S. auto industry—primarily based around the Detroit, Mich., region—faced the worst effects of the economic downturn.

“The sharp drop in auto sales and the severe challenges faced by U.S. automakers and suppliers have clearly affected those metro areas that depend most on the industry for jobs,” Brookings said.

Nationwide decline in car sales dramatically affected not only the auto manufacturers, but also their dealer networks as well as auto parts suppliers. Areas specializing in automotive manufacturing—including Detroit, Mich., Charleston, S.C., the state of Ohio, Indianapolis, Ind., and Jackson, Miss.—experienced heavy job losses.

Auto parts suppliers are increasingly facing a “double jeopardy.” First, car sales declined and the auto manufacturers reduced product orders. A gradual recovery brought with it new orders from the auto manufacturers; however, banks are unwilling to lend to auto parts suppliers to fund their working capital needs.

“More companies fail in an expansion, especially an expansion after a downturn,” said David Tull, CEO of Crestmark Bank in Detroit. “In a downturn, they [suppliers] are collecting on receivables, but they're not buying new inventory. So their need for cash goes down. Now? Their cash needs are up,” stated Tull in Automotive News.