Patience is Key to Overcoming Economic Uncertainty

Don’t panic. Although it is difficult to remain calm in the midst of a full-blown panic in U.S. and global stock markets, it is absolutely necessary. Much of the current situation is a financial panic, provoked by the irrational fear that inevitably follows an irrational boom.

Financial panics are nothing new. This is the third sell-off in U.S. stock markets in just over two decades. Nevertheless, the current episode is intense and it is not yet over. Wall Street and its peers will continue to gyrate in the coming weeks--perhaps months--as credit markets, financial institutions, national economies and the various public interventions unfold.

The forces leading to the 2008 panic have been in play for years. The U.S. housing bubble peaked in 2006 yet local markets are still searching for the floor to home prices. High-risk financial instruments that fueled the bubble brought legendary financial institutions to ground over the last six months, ultimately immobilizing global credit markets in October. Months of interventions targeting specific firms and institutions have failed.

Finally, the U.S. and other G7 nations are enacting comprehensive measures to relieve distressed markets by reducing risk, restoring liquidity and rebuilding confidence. Credit markets have begun to respond, slowly and unevenly, but it will take time. Stock markets here and abroad will take even longer to settle, especially given the broader economic slowdown now underway.

Do not bet against the U.S. economy.
Do not bet against the U.S. economy. The financial meltdown took its toll on an economy that was already struggling. Economists generally agree that the nation is in a recession and such views are well supported by recent economic news.

The trajectory of this recession is unknown. Informed opinion ranges widely, from a relatively shallow to a rather steep downturn. Duration is also an issue, especially as headlines project increasingly dire scenarios.

This downturn will likely take longer to resolve than either of the last two recessions. That does not mean years of suffering ahead. The 2001 and the 1991 recessions lasted eight months each, nearly three months less than the average downturn in the U.S. economy over the last 50 years. A comparable duration would end the current episode in early 2009, by mid-year at worst.

Key decision-makers and experienced analysts expect the U.S. economy to turnaround by year-end 2009, within the third or fourth quarters. This allows time for the housing and credit markets to unwind, a necessary condition for full recovery.

The only absolute certainty about this period is that it will end. The U.S. economy will recover, as it has from more than 20 downturns in the last century. The sheer size of this economy makes it hard for one or two sectors to keep it down for long. In terms of gross product, the U.S. doubles the size of its nearest neighbor, China, as measured in international dollars.

U.S. productivity and creativity will ultimately propel the nation’s economy to recovery. These two factors are central to the World Economic Forum’s 2008-2009 Global Competitiveness report that ranks the U.S. first among the world’s nations, despite the turmoil over the past year.

Never underestimate Texas.
Texas ranks first among all U.S. states in overall economic performance, according to the Financial Times. This ranking considers state product, employment, and personal income growth as well as foreclosure rates. Moody’s Economy.com shows Texas as one of only five states still expanding in the U.S. Their latest forecast, prepared after the October meltdown began, holds annual employment growth in Texas about two points ahead of the nation, this year and next, without a single quarter of net losses.

Texas is not immune to the national downturn. The state’s economy is slowing and will continue to decline as the national recession plays out. Employment growth this past quarter was less than half that at the beginning of the year. Hurricane Ike is partly responsible for recent weaknesses but there are larger and new challenges ahead.

Falling oil and gas prices hurt near-term growth in Texas, even if they benefit this region in the long run. The global slowdown dampens demand for Texas exports of technology and other high value goods. Decreased business travel ahead will register in local industries, as will reductions in leisure travel. Financial turmoil will affect jobs, commercial banking, venture capital and real estate development. The troubled housing markets elsewhere inhibit new relocations to the state.

It is a long and daunting list. Yet, with all of these hazards, the Texas economy is expected to remain in positive territory through 2009.

Credit, housing and stock markets must unwind for the national economy to recover. In the meantime, breathe. Appreciate the deep strengths of the U.S. economy. And, thank your lucky Lone Star if you live in Texas.