'Oh no' in '09? MSU economist makes predictions for new year

The U.S. economy may be in a deep recession, but the combined effect of plummeting housing values, rising unemployment and crumbling consumer confidence still doesn't warrant comparisons to the Great Depression.

That's the conclusion of David Mitchell, a Missouri State University economics professor and director of the school's Bureau of Economic Research. In a recently released report, Mitchell analyzed numerous economic indicators for the U.S. and Missouri before making some discouraging predictions for 2009 - a year that already has been written off by many in the business world.

While the national economy certainly has been hobbled by the real estate bust and faltering financial system, a recession is just that, Mitchell said, noting that economic indicators aren't yet signaling a depression.

"Earlier in the (third) quarter, everyone was predicting it's Great Depression No. 2," he said. "It's going to get nasty, but I don't think it's going to get that nasty."

Technically speaking, a recession is a decline in gross domestic product for at least two consecutive quarters, but the National Bureau of Economic Research defines a recession as a significant decline in economic activity spread across several months with noticeable drops in production, employment and real income. The last recession, which spanned eight months, occurred in 2001.

Mitchell said the current recession, which is now a year old, is more severe than the 1990-91 recession but not as severe as the 10-month, post-Korean War downturn in 1953-54, when unemployment jumped by more than 3.5 percent.

Of the variables Mitchell examined, he's most concerned about consumer confidence, which fell to a 28-year low in November. The drop has subsequently led to a decline in orders for durable goods, he noted in the report released in mid-December.

More alarming perhaps is Mitchell's observation that Missouri's economy has been underperforming the national economy in almost every metric. The Springfield metropolitan statistical area, though, is better off than its Kansas City and St. Louis counterparts, Mitchell noted.

Missouri's economic slide

Missouri is faring worse than the U.S. economy in terms of personal income gains, employment levels and gross product, according to Mitchell.

Since 1993, real personal income for Missourians has grown only 34 percent, compared to a 48 percent increase nationwide. During the same 15-year period, the gross state product in Missouri rose 93 percent, while national GDP posted a gain of 112 percent.

Employment in the Show-Me State has consistently declined since peaking in December 2000, due chiefly to job losses in the St. Louis and Kansas City metro areas. Conversely, most of the state's employment growth has occurred in the Springfield, St. Joseph, Columbia, Joplin and Jefferson City metro areas.

Only recently did Missouri's unemployment rate eclipse the U.S. unemployment rate, but both stood at 6.7 percent in November. That month, Missouri lost nearly 10,000 jobs, according to the U.S. Bureau of Labor Statistics.

Mitchell expects the unemployment trend to continue well into 2009. He predicted Missouri could shed nearly 100,000 jobs in the current recession, causing its unemployment rate to soar to 7.5 percent.

Springfield businesswoman Patti Penny, who founded employment firm Penmac and serves on the Missouri State Unemployment Council, said fallout from the auto manufacturing industry could conceivably push Missouri's unemployment to its highest level in a decade.

Penny said the council is particularly concerned about the solvency of Missouri's employment trust fund as benefits claims continue to rise; almost 46,500 first-time claims were filed in November. Some council members also are pushing for legislation that extends work force training or education to Missourians drawing unemployment checks, she added.

"I think people need to be nimble, because change is coming daily," Penny said. "If you stay in the old mold, you're not going to make it. ... You need to be looking for markets that will be with us for a while."

Gov.-elect Jay Nixon, who takes office Jan. 12, is promoting steps to keep Mitchell's prediction at bay. Last month, Nixon unveiled the Show Me Jobs initiative, a job-creation plan that offers a range of incentives to employers.

The bipartisan plan calls for a low-interest loan program for small businesses funded through tax-credit fees collected by the Missouri Development Finance Board; an expanded version of Gov. Matt Blunt's Missouri Quality Jobs Program; and tax credits for employers to offset a portion of the pre-employment training costs for full-time employees.

When asked to comment specifically on Mitchell's report, Nixon spokesman Oren Shur sidestepped the economist's predictions.

"It doesn't take an economic report to know that Missouri families are hurting during these difficult times," Shur said in an e-mail.

Housing market corrections

Declining housing values are largely driving the recession, according to Mitchell.

Declines in the median home price have reached 13.5 percent in some parts of the country, but the drop is still not as severe as the nearly 20 percent decline in July 1970. Mitchell calculated that the U.S. housing market should bottom out in summer 2010 at its current rate of correction.

"In short, the country is looking at a lost decade in housing wealth appreciation that began in 2007," he wrote in the report.

Locally, though, the housing market hasn't seen the staggering decline in values plaguing California, Nevada, Florida and other states.

Springfield Realtor Lynn VandenBerg, a self-described "number-cruncher" with Keller Williams Realty, said prospective homebuyers in the Ozarks shouldn't make decisions based on national news reports about the housing bubble. She said area real estate appears to be rebounding much faster than other regions throughout the country.

"I think buyers right now are waiting to see when the market's going to bottom out," she said. "And in Springfield, I already believe that we're in that bottom-out process, because Springfield did not experience the high highs or the low lows that other markets did."

While Springfield area home sales have been trending downward for some time, VandenBerg said December 2008 figures matched those from December 2007. The seasonal drop in housing inventory also should help homeowners looking to sell, but they must be realistic about market conditions when pricing their homes, she added.

"Sellers today have to be a lot more savvy," VandenBerg said. "It's not based on what you paid for it. It's not based on what you paid for it plus all your improvements. It's strictly based on what someone else will pay you for it."

November figures released by the Greater Springfield Board of Realtors suggest the local market is balanced for homes priced at $140,000 or below, meaning the inventory in that range is roughly six months, VandenBerg explained.

For houses priced between $326,000 and $350,000, an inventory of more than19 months favors buyers, but those priced at $301,000 to $325,000 only have an inventory of about eight months, she noted.

Mitchell said the housing market correction is a necessary - albeit unpleasant - cleansing that needs to occur on local and national levels.

"The best thing to do is to leave the problem alone and let these prices readjust," he said.

"The longer we delay that price readjustment, the more painful it's going to become. The prices have to return to a level that people can afford."[[In-content Ad]]