BY KEITH BENMAN, Times of Northwest Indiana
kbenman@nwitimes.com
In the spring of 2006 home sellers and buyers in some major U.S. markets started to notice something that hadn't occurred in more than a decade: housing prices were going down.
The loss in home values was accompanied by an upsurge in foreclosures, much of it due to the loose lending practices that boosted home prices in the first place, according to Donald Coffin, a professor of economics at Indiana University Northwest.
As home sales slowed, employment in home building collapsed, followed by a drop in auto production, as credit tightened and people bought fewer cars.
"You add all those things up and it adds up to recession," Coffin said.
In the past three months, U.S. employers have shed 260,000 jobs, according to the U.S. Bureau of Labor Statistics. The national unemployment rate hit 5.1 percent in March, after standing at a seven-year low of 4.4 percent a year before.
In Northwest Indiana in March the unemployment rate was 5.6 percent, with 1,713 fewer people working than one year before.
The classical definition of a recession at one time was two straight declines in U.S. gross domestic product, which hasn't occurred yet. First quarter GDP was weak, a 0.6 percent according to preliminary figures. But it did not drop.
But the National Bureau of Economic Research, which officially "declares" recessions for the U.S. government, now says it uses a broader definition that includes real income, employment, industrial production and sales. In an online briefing on its methods, it notes it does not declare the beginning of a recession until six to 18 months after the fact.
Coffin said everyone seems to be thinking we are in a recession, but only time will tell if it's that -- or only a slowdown or slump.
"This all will really ripple through the economy," Coffin said. "It's hard to say where it will hit next."
The uptick in home foreclosures first noticed in 2006 has since turned into a tidal wave of foreclosures in some states. It's now known as the subprime crisis, so-named for the risky home loans that account for the vast majority of defaults.
Adding to everyone's anxieties are record-high gasoline prices and steep hikes in prices for basic foodstuffs like eggs, milk and wheat.
The dominant theme now is caution, said Bala Arshanapalli, a professor of economics at Indiana University Northwest. That goes for both policy-makers and consumers.
Consumers should be thinking about paying down debt and perhaps even saving, if possible, Arshanapalli said. A good place to start would be the economic stimulus checks taxpayers are receiving from the U.S. Treasury.
"You do have a lot of bad news out there,' Arshanapalli said. "I would be very careful how I spend that money."
Consumer Credit Counseling of Northwest Indiana has been hearing the bad news for two years, as people with adjustable rate mortgages get hit by interest rate increases.
Some have been able to handle the increases, but job loss and medical bills have pushed many over the edge, said Pamela Stalling, Consumer Credit Counseling executive director. Now they are struggling to keep their homes.
"We have more and more people coming in at the last minute, and often it's too late," Stalling said. "That's why consumers need to know more."
So far, policy-makers' responses to the crisis seem to have worked to stave off any kind of collapse in financial markets, Arshanapalli said. The Federal Reserve has taken a number of steps, including making $218 billion in low-cost loans to investment houses.
"The Fed is doing everything it can to soften the blow on the average person," Arshanapalli said.
The Fed's action to stave off collapse at investment firm Bear Stearns and arrange for its sale to JPMorgan Chase grabbed headlines as a "bailout." But it wasn't Bear Stearns the Fed was worried about, it was all the firms that had invested money there, Coffin said.
"The Fed clearly thought there was a real possibility of a financial meltdown," Coffin said. "This will all just kind of ripple through the economy. It's hard to tell where it will hit next."