Economist Chris Varvares looked into a crystal ball yesterday and saw a stormy few quarters in our future.
Varvares, who is president of Macroeconomic Advisors, told business leaders at a lunch event held by the Richmond Association of Business Economics that we are in a recession that will continue for at least the next two quarters, before gradually pulling out of it in the second half of next year. Officially a recession occurs when there is negative growth for two consecutive quarters; Varvares pegged the beginning of this one at the end of June.
Many economists didn’t see the recession because most people thought the actions the Federal Reserve was taking, starting in the summer of 2007, would keep the financial markets stable, Varvares said. As business prospered, banks became more willing to make riskier loans. As a result more fragility was built into the market, which in the end made it more unstable.
“I think the big thing that our clients on Wall Street (talk about) was the Lehman Brothers failure,” Varvares said. “That was the watershed moment that made a situation that was bad, go to very bad.”
Macroeconomic Advisors’ prediction is that GDP growth could fall as much as 4 percent in the fourth quarter, but Varvares said it is hard to tell how deep the recession will go because of the difficulty gauging credit markets and how soon they will loosen.
“We just don’t know the seizing up of credit how extensive it is, because we just don’t have actual good real time measures where we can look up one number somewhere to tell us how much credit has shrunken in the economy,” Varvares said.
Asking if any bankers were present, he told them, “Leave and go make some loans.”
Varvares said we need aggressive fiscal public policy to help mitigate the impact of the recession, and supports bail out and stimulus packages.
“Because of the nature of the financial implosion and seizing of the credit, we’re standing on the edge of the abyss, if you fall in you can get to a very bad outcome,” Varvares said, “To avoid falling in we have very aggressive policies which we think helps us to get a relatively — compared to some expectations — benign outcome.”
He said we can expect more cuts and rebates aimed at consumers in the first half of 2009 including a $75 billion stimulus package and a $100 billion permanent tax cut. He also said the Federal Reserve might cut the interest rate to as low as half a percent for the duration of next year.
Varvares is also president of the National Association for Business Economists, the parent organization of the Richmond group that hosted him.
Richard Chess, current president of the Richmond chapter, said the region is being hit harder by this recession compared to previous ones, but said that we are not hurting as bad as some other cities.
One of the biggest effects this time around is the corporate losses of Circuit City, LandAmerica and Chesapeake Corporation, Chess said.
“There is this ripple affect that’s going to happen with those three stones dropping in the water, which we’ll start feeling middle-late next year, there is no recovering quickly from that.”
He said the current losses have a greater impact because we have fewer Fortune 500 companies and other big businesses in the area than we did 15 to 20 years ago. “As a percent, we’ve lost a much greater percentage of the big boys this time than we’ve done in any other past economic downturn, probably going back to the Civil War,” Chess said.