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Banking & Finance

Wachovia Analyst Sees Long Road Back

SBJ Staff

Back in July 2008, after two straight quarters of decline in U.S. real gross domestic product, when many economists were rejecting the term recession, Mark Vitner, senior economist at Charlotte-based Wells Fargo Securities, disagreed.

In 2007 and 2008, exports of U.S. manufactured goods were still rising, covering up and compensating for the decline in housing starts, rapidly declining consumer confidence and change in retail spending – all key drivers of the U.S. economy.

He stated back then that this recession would be much more severe than the 2001 and 1991 recessions, pointing out that in the 2001 recession the consumption of goods and services in the economy never declined. It turned out he was right.

So, when he came to Savannah last week to talk at a private luncheon hosted by Wachovia/Wells Fargo at the Charles Morris Center, an event for the bank’s top customers, people listened. 

In a room with many of Savannah’s financial “heavy hitters,” there was rapt attention as Vitner and Gary Schlossberg, also with Wells Fargo Securities, outlined their views on the state of the economy, and the nature and time table for a turnaround.

It isn’t soon.

Presenting very sobering statistics on the fundamentals of the economy, Vitner said that the earliest he sees a turnaround is mid- to late 2010, and for many, it will be more of a statistical recovery than an actual recovery due to expected trends in high unemployment.

While the recession appears to have ended this summer, statistically, “the recovery will be slow and agonizing,” is Wachovia/Wells Fargo official position, and it will take years to recover the jobs.

“The downturn turned into the longest of the post-World War II period, 19 months, but some signs of stabilization are appearing,” said a report the bank prepared to highlight Vitner’s and Schholossberg’s key points.

He also agreed that the banking industry problems are not over, and that the underlying problems with commercial loans is “the next shoe to drop,” adding, “the people at the Fed (the Federal Reserve) don’t seem to understand this. There are no programs in place to deal with this, like the programs put in for residential loans.”

He also explained that the improving GDP numbers in the last quarter “are all wrapped around the “Cash for Clunkers” program.”
“Things are less worse,” he said, and explained that this recovery will be what economists term a “V” recovery, where much of the recovery occurs “below the line” – not yet positive growth, but less worse.

The business community will still be hurting in 2010, Wachovia/Wells Fargo forecasts, with business fixed investments expected to be down another 1.8 percent from 2009, but a far better trend than the -18.1 percent drop in 2009 from 2008.  (see chart 1.)
But perhaps Vitner’s most chilling point was the nation’s  actual unemployment numbers.  He believes the U.S. is actually at a 17.5 percent unemployment level, not the official 10 percent that is widely reported.

“The 10 percent does not include the people who have stopped looking and the ‘underemployed,’ the people whose hours have been cut back to 36 hours or 32 hours a week, versus 40 hours. That isn’t captured. I believe we’r

e actually at about a 17.5 percent unemployment level.”  He said that 20 percent of the workforce was out of work at some time in the year.
“One of my chief concerns is the large part of the U.S. – the number of states that have 12.5 percent and more in unemployment.”  He added “that statistically, once people are out of work for six months, more than 80 percent of unemployed people never go back to work.”
As the U.S. comes out of this recession, “if jobs are recovered at the same pace as after the 1991 and 2001 recessions, it will take until the second quarter of 2017 to recover the jobs lost to date,” he added.


He also discussed the change in bank’s credit policies, and the virtual elimination of banking relationships which used to be “part of the equation” in making commercial loans.  It’s all a numbers game now, as the FDIC and other bank regulating agencies have stiffened requirments on loans.  Fewer and fewer customers meet the financial requirements for loans.


Regarding residential real estate, “we are seeing some recovery, but it’s only in areas where we’ve got stimulus programs going on, such as aid to state and local governments,” Vitner said.


“While construction may have seen a trough, we expect prices to continue declining for some time,” the bank’s charts and analysis states.  A large portion of real estate sales now being reported are foreclosure and distressed sales. “The first-time homebuyer tax credit is likely providing a lift; however, it is due to expire at the end of the year.


In Savannah, single family housing permits “have plunged 76 percent from its cycle high at the beginning of 2007,” according to Wells Fargo/Wachovia.

Other highlights:
• International trade collapsed in 2008. “Imports have fallen dramatically this year, while exports have fallen less.”  That shift in balance of payments is actually a good thing, he said. For too long, the U.S. was buying too much from foreign countries, versus selling U.S. products, exporting our country’s money.

• Businesses have struggled to bring inventories in line with demand.  Massive liquidations occurred in the first and second quarters of 2009.  Vitner sees this trend continuing for several more quarters, though at a slower trend line.

• “The torrent of layoffs and job losses is unlikely to abate until next year.”

• Housing prices and home equity are still likely headed lower, weighing further on consumer spending and sentiment.

• The federal stimulus, which includes a reduction in payroll withholdings, provided a lift to take-home pay in the middle of this year.

• After declining in 2009, global economic growth is poised to rebound in 2010, with recovery already occurring in developing nations such as China and Brazil, and signs that the European recession is coming to an end.  The U.S. dollar is expected to “grind higher” against most major currencies.

• The stock market may “give back some of its gains by Thanksgiving,” according to Schlossberg.

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