Word to the wise: Do not open your 401(k) statement.
The financial crisis is evolving into a economic crisis. There has been a sharp slowdown in global growth and it has implications for corporate earnings and consumer spending, said Mitch Stapley, chief fixed income officer for Fifth Third Bancorp. Stapley gave his quarterly outlook on the economy at a luncheon Thursday at Frederik Meijer Gardens.
“Sept. 15 was really when everything just kind of shut down,” Stapley said. “The market just had four days of double-digit gains or loses — everything else has been triple digit since Sept. 15. The fourth quarter is going to be ugly.”
Stapley said the first two quarters of 2009 will be ugly, too, with GDP growth down by 2 to 3 percent. He expects to see some kind of recovery in the second half of 2009.
The policy response on the part of the federal government has been absolutely massive, he said, as it had to be for a crisis of this magnitude. The country is at about $900 billion into the relief effort and that amount will climb because another stimulus package is coming.
“We would not be surprised to see the toll of this thing rise to $1 trillion, or 10 percent of GDP,” he noted. “Historically, if you look at Sweden when it was in a similar situation, it took a sizable response to get it over with quickly, and it ended up costing Sweden 10 percent of GDP.”
One of the first things the new administration should do is get a lifeline out to the Detroit automakers and stabilize that situation, Stapley believes. Detroit automakers are pushing for an emergency government loan of at least $25 billion to fend off a cash shortage. General Motors, Ford Motor and Chrysler sales are all down 20 percent this year and are expected to slide further. This bridge loan would be in addition to the $25 billion Congress approved in September for the industry.
The ramifications of just one of the Big Three automakers tanking are alarming. A study released by the Center for Automotive Research on Nov. 5 estimated that the impact on the U.S. economy would be “substantial” if one or all of the Big Three were to go under. A shutdown of their U.S. operations would lead to a loss of 3 million jobs nationally. In addition to a higher jobless rate, the economy would suffer in terms of lost wages, reductions in social security receipts, personal income taxes paid and an increase in transfer payments, according to CAR. The shock wave would roll over suppliers, too.
“We are so woefully, woefully, woefully, woefully underinvested,” Stapley said of the country.
There is a systemic deleveraging going on in the economy right now, he observed. Consumers are deleveraging. There are massive hedge fund liquidations taking place. Stapley guarantees that at least three things are going to come to pass:
- New legislation will provide more oversight and protection to the financial markets.
- Taxes will go up.
- Savings will go up because Americans are going to begin saving again.