September 2011 Economic and Business Outlook

by Douglas L. Williams, President and Chief Executive Officer

Economic activity during the first half of 2011 was surprisingly weaker than most analysts and forecasters had anticipated.  The most recent numbers from the Bureau of Economic Analysis indicate the economy continued to expand at an anemic pace as US GDP grew 0.7% over the first six months.  With persistently high unemployment, continued deterioration in housing values, and excessive government and consumer debt levels, there is little reason for optimism as we look ahead. 

 
Weak economic activity during the first half of the year was initially attributed to a series of temporary factors including the Japanese earthquake and tsunami, unrest in North Africa and the Middle East, and cold weather in the US.  However, closer examination of historic patterns of economic cycles suggests that recovery from recessions accompanied by a major financial crisis tends to be subdued for an extended period of time.  Throughout history, financial crisis have been preceded by episodes of excessive speculation and borrowing.  The process of correcting those excesses is complex and lengthy, and, as a result, new capital formation and investment in growth is limited for a prolonged period.

 
The continuing political drama regarding the downgrade of US government debt, the debt ceiling and the budget deficit is an obvious example of the difficulty of correcting these excesses.  The simple truth is that the current rate of growth in US government borrowing is unsustainable and that government's share of economic activity must shrink in the years ahead if the economy is to grow and living standards are to improve.

US consumer debt levels exploded over the last decade rising from approximately 66% of GDP in 2000 to over 99% in 2009.  With high unemployment, low growth in personal income, and the evaporation of considerable housing equity, the deleveraging process for US consumers will continue to restrain spending for another 2-3 years or more.

 
Correcting the excesses of the long economic expansion of the last decade will encumber the US economy with a subdued pace of activity for a prolonged period.  Business owners and managers are adjusting growth and return expectations accordingly.  Consumers have shifted their focus from borrowing and spending to repaying debt and saving.  These are significant changes in economic behavior and they will shape our politics, our business strategies, and culture for years to come.