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Downsized economy is new reality, markets expert says

America's economy has not only been fundamentally reshaped by the Great Recession, it's been resized.

Stock prices collectively remain about 20 percent below their high. Nationally, housing prices are down just over 20 percent (though far more in select states such as Florida). Prices of labor and many other staples have dropped (with higher education and health care among the notable exceptions).

Put it together and BB&T markets expert John Jung figures the economy has contracted roughly 20 percent the past two years — setting a new base point from which we have to start gradually growing the economy again.

With the emphasis on gradually.

"We've been here before. The economy will survive," Jung, senior managing director of BB&T Capital Market, said during a visit to Tampa on Thursday.

"But we can't sit around and say, 'My house was worth $1 million. When's it going to be worth $1 million again?' We can't look to 2007 as a policy goal."

Speaking at a breakfast meeting of clients and bank guests at the Tampa Yacht & Country Club, Jung spread blame around for the financial crisis: "bad" regulatory laws like Sarbanes-Oxley, poor lending practices, excessive risk taken on Wall Street.

But he singled out the biggest culprit as the overleveraged consumer.

The economy typically hums along nicely when household debt is equivalent to between 40 and 60 percent of the country's GDP, or economic output. By 2007, it had climbed above 90 percent. The last time household debt came close to 100 percent was right before the Great Depression.

Throughout this year, consumers have been pulling back dramatically, saving more and spending less in part because banks are restricting access to credit. On Wednesday, the Federal Reserve said consumer credit card debt fell $9 billion in August, the largest drop since February and the 11th straight monthly decline.

Meanwhile, the federal government is headed in the opposite direction, spending aggressively through stimulus efforts and bank and auto bailouts. As a result, the gross federal debt is expected to approach $11.9 trillion this year, up 30 percent since 2007. That translates to about $40,000 per person.

An ardent backer of letting the free markets work, Jung has been highly critical of increased government intervention. He predicted regulators will likely step in again as banks battle a rising tide of soured commercial real estate loans.

"Government saved the financial systems, and, after they did that, they should have gotten out of the way," he said.

The key to recovery, Jung said, is no mystery: "We've got to put the consumer back to work."

With about 15 million unemployed nationally, including a million in Florida alone, the country would need to slash unemployment levels in half to get back on solid economic footing, he said. But that process, even based on optimistic growth projections, will take years.

"If we grow the economy 3 percent a year for the next five years, we'll put those 7.5 million back to work," he said.

And the alternative? "If unemployment gets to 20 million or 25 million," Jung said, "it's going to get very dark."

Jeff Harrington can be reached at jharrington@sptimes.com or (727) 893-8242.

Downsized economy is new reality, markets expert says 10/08/09 [Last modified: Thursday, October 8, 2009 9:37pm]
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