As recession's effects linger, a turning point hard to predict

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Crashes and consequences - A look at key indicators and economic slumps.

Octobers are tough for Wall Street.

Eighty years have passed since the crash of 1929 that preceded the Great Depression.

But an even bigger drop in October 1987 had little impact on the nation's factories, stores or job market. This year, we're still feeling the after-effects of last fall's market meltdown. Without the benefit of a stock market crash, the recession of 1990-91 started around this time of year; the 1981 slump got going in November.

What makes a financial meltdown on Wall Street turn into bad times on Main Street is how well money flows -- or doesn't, economists say.

Consider the monthly meeting of managers of the tiny Virginia United Methodist Credit Union.

They gather at a small round table in Chief Executive Officer Carol Mathis' office to check on which customers are falling behind with loan payments.

There are about a half-dozen at any one time, up from the usual one or two. Most still are making payments, but job losses mean they need -- and the credit union has granted -- a longer period of time to repay the debt.

But listening in at those meetings reminds loan manager Mike Haydon that, these days, it's worth asking about a $200 judgment against a would-be borrower, where in flush times it might be easier to let it slide. Haydon asks now, just to make sure a small bill someone owes isn't a sign of deeper financial trouble.

Mathis worries that most credit-union members don't want to borrow these days. The credit union makes income for its members from interest on the loans it makes.

And thinking about what they learn about borrowers' troubles at those monthly meetings, nobody at the credit union is sure they agree with the business economists who say the recession is over. And they aren't alone.

"This is deeper, different than anything we've seen in the postwar era," said Barry Pfitzner, an economics professor at Randolph-Macon College. "Predicting the turning point is particularly difficult."

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Like the Great Depression, but unlike recessions of the past 30 years, the total amount of credit -- loans -- banks provide has dropped and stayed down, a Richmond Times-Dispatch review of economic statistics shows.

Unemployment has climbed faster and higher this year than in any other recession of the past 30 years, the statistics show.

The shrinking of bank lending this year is unlike anything seen since the Depression, Pfitzner said.

Unlike the Depression, this time Washington pumped trillions of dollars into the economy -- investing in banks hoping to get them to lend; bailing out insurance giant AIG and automaker General Motors; and sending billions of stimulus dollars to states and localities for roads and schools.

"That probably saved us from falling off a much bigger cliff," Pfitzner said.

Pfitzner's Randolph-Macon colleague, David A. Brat, believes it is too early to know whether the likely uptick that business economists predict for the rest of this year is just a blip fueled by federal spending.

The problem is that business investment still is down, inventories still are shrinking, and consumer spending remains soft.

"No way yet is the engine running that's going to lead you out, long-term. Consumers are still not spending, business investment isn't rising," Brat said. "We're going to have below-average GDP growth, but it's not going to feel good."

A lot of businesses still are cautious, said Spencer L. Cowles, chairman of the economics department at Eastern Mennonite University in Harrisonburg. "I think they understand debt pretty well, and they are saying: 'Nah, it's not worth it right now.'"

Consumer spending, unlike other postwar recessions, also is down. That's making predicting the pace of any recovery hard, economists say.

"One of the big unknowns is unemployment," Cowles said. "When the economy starts adding jobs, and it seems to be getting close to that point, then people who have jobs may be less afraid and will start spending."

Now, though, some of the lowest interest rates in history aren't enough to get people to start borrowing, the credit union's Haydon said -- though the low rates have encouraged him and Mathis, the credit union CEO, to join homeowners who refinanced mortgages to save money.

"People are still uncertain and they don't want to borrow until they feel better about things," Haydon said. "They're saying: 'I'll just drive the car for another year.'"

It means loans at the credit union, which usually stand at between 90 and 100 percent of the funds it has available, now are at about 75 percent of that total.

What credit union members are doing instead is putting money into savings. Deposits rose 7 percent in the past nine months, Mathis said.

She is cutting back on spending and boosting savings, too. She's paying down debt and has postponed plans to retire.

She keeps reminding her daughter that having a nest egg equal to six months of living expenses is a good goal -- but she's been thinking to herself that nine to 12 months may make more sense in times like these.

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The tough times remind credit union marketing manager Janie Hightower of her dad's stories about losing the family farm back in Tennessee, and the hardship he and his 10 brothers and sisters suffered in the years after that.

"Saving and not getting into debt was something he talked about to us all the time," she said. "I'm not sure if he ever got a credit card."

She's now talking to her kids about the need to start saving.

"I hadn't planned to for a while, but these days, I just thought I should," she said.

Economists aren't looking for another Great Depression. But they aren't sure when the hard times really will end.

"Economic historians are still publishing new research explaining the Great Depression, the Panic of 1907, the Panic of 1873, the Panic of 1837," said Bradley A. Hansen, chairman of the economics department at the University of Mary Washington.

"I am personally reluctant to make predictions much beyond: If you raise the cost of something, people will do it less. So I am not really sure what the recovery will look like."

Few economists, though, expect long-term changes in the way people behave. They expect consumers will resume their free-spending ways and heavy credit-card use before too long.

"In every recession and crash I've seen, we've come back faster than I'd thought," Cowles said. The reason, he said, is that consumer spending surges back surprisingly quickly.

Brat at Randolph-Macon agrees.

"We'd been through a bubble [in the late 1990s], then there was 9/11, Enron, the accounting scandals," all of which contributed to the 2001 recession.

"Five years later, we're here after another bubble? No, I don't think we're going to change much."

Contact David Ress at (804) 649-6051 or dress @timesdispatch.com.