The Value of Michael Kors: $666 Million Man

March 13, 2012

Let's be clear: Michael Kors is on a pretty good run, but it's not that he hasn't had a few disappointments. He, for instance, is not a teacher in Ontario.

So far, they are the real winners in Kors' December IPO. The Ontario Teachers Pension Plan Board was the only named Kors investor that didn't sell stock in the public offering.

And so instead of getting $20 a share -- as Kors himself did when he sold off 5.8 million shares, raising $117 million -- the pension plan's 13.2 million shares are now worth $42.08 each.

Kors, sadly, sold at what now seems to be a low price.

He might have another chance to get a better valuation since he, along with chief executive officer John Idol and backers Silas Chou and Lawrence Stroll, also has a stake in the Michael Kors operations in China, Hong Kong, Macau and Taiwan, which were not part of the IPO.

And he has steady employment.

The designer's contract gives him a job for life, an annual salary of $2.5 million and creative control over products bearing his name, assuming he can stay on the right side of "commercially reasonable." (The Wall Street types apparently don't approve of art for art's sake.) Kors is also eligible for a bonus and certain "perquisites" including life insurance, health club membership, car and driver for business purposes and tax services.

It's not the deal scored by Tommy Hilfiger -- who received 1.5 percent of U.S. revenues over $48 million when his company was public -- but it seems to be enough for Kors to keep the heat on.

If he does have to dip into the piggybank, he still owns 15.8 million shares of the company that bears his name, or 8.3 percent of those outstanding. On paper, that's worth $666.8 million, so he could always buy half a million of his $1,295 shearling racing jackets to keep warm.

That's something, at least.

For more information, visit: http://www.wwd.com/fashion-blogs/michael_kors_the_666_million_m-12-02

H&M Cutting Costs By Using Digital Bodies

December 28, 2011

IT wasn’t the first time the fashion industry was slammed for extreme Photoshopping. But an entirely fake body?

That was the collective clucking earlier this month when it was exposed by Aftonbladet, the Swedish newspaper, that H&M had superimposed the heads of real models onto computer-generated mannequins for an online swimwear campaign.

“In the future, even models’ faces won’t be considered perfect enough for online fast fashion, and we’ll buy all of our clothing from cyborgs,” said a writer for the style blog Jezebel. The Norwegian Broadcasting Corporation blasted the retailer for “creating unrealistic physical ideals.”

But the practice is unlikely to end. Putting aside the technological advances that make digitally altered photographs harder to detect, the boom in fashion e-commerce means that radical retouching is here to stay and will probably go further.

It can be cheaper to superimpose a model’s face on a virtual body than it is to photograph a model in multiple outfits, said Ashley Mears, an assistant sociology professor at Boston University and former model, whose book, “Pricing Beauty,” explores the harsh economic realities of modeling.

For working models, it represents an existential threat. Models are generally paid whenever their faces are used. But they’re also paid for their time, and using a virtual mannequin means money taken out of their already-skinny pockets. (The Bureau of Labor Statistics says the median wage for models in the United States was $13.18 an hour in 2008.)

“If H&M just shot her head smiling at different angles, they’d have to pay for hair and makeup, plus the time to prepare her, but would not have to pay for the time it would take her to change in and out of multiple outfits,” Dr. Mears said. “That can be costly indeed.”

In a way, the H&M models should be glad they were included at all. To keep costs low, many online retailers crop out models’ heads entirely to avoid multiple-use fees. That is why so many sites, including low-end Wal-Mart and high-end Net-a-Porter, display page after page of headless dresses and sweaters.

(In one creative work-around, Alexander Wang, for his new e-commerce site last spring, partnered with the artist Terence Koh to obscure models’ faces with halo-shaped fluorescent bulbs: visually striking, but still a bag over the models’ heads.)

If there is any good modeling news in the H&M situation, it’s that a pretty face remains a bankable asset. H&M might have gotten away with a virtual body, but it did not dare create a virtual face. Consumers would have been turned off.

Scientists call it the “uncanny valley” theory, which holds that people will tolerate only so much artificial human likeness before attraction turns into revulsion. Think lifelike sex dolls or Michael Jackson’s nose.

“There is a very striking uncanny effect for faces” but less for nonmoving bodies, said Nancy Etcoff, an assistant clinical professor at Harvard Medical School. “If they added a super-realistic but not-real face, they’d become uncanny, and therefore frightening, eerie and creepy.”

http://www.nytimes.com/2011/12/18/fashion/hm-puts-real-heads-on-digital-bodies.html?_r=1&ref=fashionandapparel

Wall Street Dragged Lower

June 15, 2009

U.S. stocks fell broadly on Monday as regional manufacturing data dented optimism about the economy’s health and resource shares fell alongside commodity prices.

Economists had expected to see slight improvement in the New York Fed’s “Empire State” index, but the survey showed the factory sector shrank at a more severe rate in June than the previous month. After a series of signs the economy may be stabilizing, investors are looking for more definitive signals of its improving health.

“The New York manufacturing index hinted that the improvement in economic data may be slowing down after the rapid recovery we’ve seen over the past one to three months,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

The stronger U.S. dollar helped pull the price of oil below $70 a barrel from a near eight-month high. The decline hit energy companies’ shares, including Chevron , down 3 percent at $70.50. The S&P energy index slid 3.3 percent.

The S&P 500 eased off gains of about 40 percent from March’s 12-year low, but was still up about 36 percent from that trough.

The Dow Jones industrial average fell 210.25 points, or 2.39 percent, to 8,589.01. The Standard & Poor’s 500 Index slid 25.74 points, or 2.72 percent, to 920.47. The Nasdaq Composite Index gave up 53.23 points, or 2.86 percent, at 1,805.57.

While the recent run-up in commodity prices had helped stocks extend their rally, there has also been concern that a surge in oil and other commodities could hamper any budding economic recovery. Higher energy costs are a drag on consumer spending and corporate profits.

Also dampening sentiment, Goldman Sachs cut its rating on Wal-Mart Stores Inc to “neutral” from “buy,” saying it did not see a lot of positive catalysts to drive shares higher in the near-term as expense pressures and tougher sales comparisons persist.

The Dow component fell 2.9 percent to $48.42, and was among the top drags on the index. The S&P’s retail index fell 2.3 percent.

Technology shares, which have been among the biggest gainers in the three-month market rally, also fell heavily as investors took profits. The PHLX semiconductor index fell 2.2 percent. Shares of tech bellwethers, such as Qualcomm Inc , down 4.4 percent at $44.04, led the Nasdaq lower.

For further information, visit: http://www.publicbroadcasting.net/wned/news.newsmain/article/0/0/1518117/Business/Economy.concerns..commodities.drag.Wall.St.lower

Increase for Retail During May

June 14, 2009

Retail sales were still 9.6 percent below their levels from last year, and economists said that consumer spending, while stabilizing, was not likely to come roaring back this year. Consumers were saving more of their income and spending less as they worried about the prospect of rising unemployment and wage cuts.

Also on Thursday, the Labor Department reported that first-time jobless claims fell more than expected last week in a continuation of some marginally better indications from the job market. Claims for unemployment insurance fell 24,000, to a seasonally adjusted 601,000.

Last week, the government reported that 345,000 jobs vanished in May, a stark figure but a much slower pace of job losses than months earlier, when as many as 741,000 jobs were lost in a single month. Economists still expect businesses to continue cutting jobs for much of this year, but at a declining pace.

“The underlying tone of consumer spending remains weak, and while the steep declines in consumer spending seen over the second half of 2008 have been arrested, sales have at best stabilized at a low level,” Richard Moody, chief economist at Forward Capital, wrote in a research note.

As income growth dwindles and the recession lingers, consumers are cutting nonessential spending from their budgets, as evidenced by continued declines in luxury purchases and sliding sales at high-end retailers, economists say.

“It’s still in search of the bottom,” Michael P. Niemira, chief economist of the International Council of Shopping Centers, said of the retail market.

A gauge of how businesses are adapting to the recession and lower levels of consumer demand showed that companies continue to slash their inventories. The government reported Thursday that business inventories fell 1.1 percent in April from a month earlier, their eighth consecutive month of decline.

For further information, visit: http://www.nytimes.com/2009/06/12/business/economy/12econ.html

Economic Recovery Not Yet Arriving

June 12, 2009

With a rise in the number of people continuing to receive jobless aid and companies holding off on hiring, analysts warn an economic recovery is still far off.

The Labor Department said Thursday that initial claims for unemployment benefits fell last week by 24,000 to a seasonally adjusted 601,000. That’s below analysts’ estimates of 615,000, reported the Associated Press.

However, the number of people claiming benefits for more than a week rose by 59,000 to more than 6.8 million, the highest on records dating to 1967. The Labor Department also revised last week’s data on continuing claims, replacing what had been a drop of 15,000 with an increase of 6,000.

The Commerce Department said Thursday total retail sales rose 0.5 percent in May, the first advance in three months, lifted by strong gasoline and building material receipts. Consumers also spent more on food and clothing. Sales fell 0.2 percent in April.

The sales report fed optimism that consumer spending would probably be flat to modestly lower in the second quarter, instead of falling sharply as expected by most analysts.

Spending, which accounts for about 70 percent of U.S. economic activity, rose 1.5 percent in the January-March period, after a 4.3 percent dive in the fourth quarter.

Because rising gasoline prices aided last month’s retail sales gain, consumer purchasing could slow in other areas.

Meantime, the number of U.S. households on the verge of losing their homes dipped in May from April, and the annual increase was the smallest in three years, the AP also reported.

Foreclosure filings fell 6 percent in May from April, according to RealtyTrac Inc. More than 321,000 households received at least one foreclosure-related notice last month–18 percent more than a year earlier–but the smallest annual gain since June 2006.

As layoffs, rather than risky mortgages, become the main reason that borrowers default on their home loans, many economists expect foreclosures likely will remain elevated this year and into 2010.

Banks repossessed about 65,000 homes in May, up from 64,000 in April, due to big increases in several states including Michigan, Arizona and Nevada.

The Obama administration announced a plan in March to provide $50 billion from the financial industry rescue fund as an incentive for the mortgage industry to modify loans at lower monthly payments.

On Wall Street, investors welcomed the better-than-expected report on jobless claims and growth in retail sales, pushing stocks higher Thursday morning. Rising interest rates have recently become a concern and had sent stocks lower on Wednesday.

For further information, visit: http://www.pbs.org/newshour/updates/business/jan-june09/economy_06-11.html

Department Store Sales Down

June 12, 2009

While specialty stores joined with the overall economy in registering small gains in retail sales last month, department store sales were down and yearly comparisons still show the depths of the struggling economy.

Sales at specialty stores advanced a seasonally adjusted 0.4 percent compared with April, while department stores dropped 0.7 percent, the Commerce Department reported Thursday. However, compared with a year earlier, specialty store sales decreased 7 percent to $17.3 billion and department store sales fell 7.1 percent to $15.8 billion.

All retail and food service providers reported an increase of 0.5 percent last month, but compared with May 2008, sales were down 9.6 percent to $340 billion. The uptick in overall retail sales was driven primarily by higher gas prices. The retail sales change from March to April was revised to a decline of 0.2 percent from a previously reported drop of 0.4 percent.

“Nothing in the May data suggests that the retail picture has improved,” said Bob Duffy, leader of the retail industry practice for global advisory firm FTI Consulting.

The meaningful comparison for retail sales figures is the year-to-year picture, he said, and in that respect, apparel retailers continued to struggle in May. Sales for specialty stores and department stores also declined in April and March after showing early resiliency in the first two months of the year.

“At best you could describe retail sales as being mediocre, and that may be stretching it a bit,” said John Lonski, chief economist at Moody’s Investor Services. “The severity of the contraction incurred by retailers may be easing, but make no mistake about it, retail sales are well under what had been expected as recently as a year ago.”

Investors concurred, sending the S&P Retail Index down 6.09 points, or 1.8 percent, to 329.59 on a day when the major indices barely managed to hold onto gains earlier in the session. The Dow Jones Industrial Average finished ahead 31.90 points, or 0.4 percent, at 8,770.92, after hitting a new high for the year of 8,877.93 earlier on Thursday. The S&P 500 and Nasdaq Composite finished with larger gains, advancing 0.6 percent and 0.5 percent, respectively, to 944.89 and 1,862.37.

Consumers are still coping with negative macroeconomic trends like a weak housing market and job uncertainty. Economists said consumers are willing to spend on staple items in the current climate, but not on much else. Sales of luxury goods or discretionary items, like apparel, have not improved.

“Financially stressed consumers continued in May to concentrate their spending on essentials,” said Charles McMillion, president and chief economist at MBG Information Services.

Sales in most categories were “generally either up or down modestly,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight. “Overall, the state of retail sales remains weak.”

Lonski said, “Some of the gloom hanging over consumer spending is lifting; nevertheless, the outlook remains treacherous.”

Economists said retail sales results are likely to remain weak through the third quarter. Fourth-quarter results could show some year-over-year improvements, primarily because of easier comparisons to a dismal fourth quarter in 2008. As year-to-year comparisons continue to be weak for the remainder of the year, additional store closures or further market contraction should be expected, economists said.

“We will stabilize, but we’ll stabilize at the new lows,” said Duffy.

On Wall Street, retail declines were the norm, with only a few exceptions. Destination Maternity Corp. checked in with an 11 percent rise, to $17.17, one day after reporting that it will relaunch its Two Hearts Maternity collection in Sears stores and introduce it in 100 units of Kmart, Sears’ sister division at Sears Holdings Corp.

The Talbots Inc. also went against the grain, picking up 19 cents, or 3.8 percent, to close at $5.16. The company announced the sale of its J. Jill brand to an affiliate of Golden Gate Capital on Tuesday and reported a smaller-than-expected first-quarter loss and plans for additional staff reductions on Wednesday.

For further information, visit: http://www.wwd.com/business-news/retail-sales-fall-year-on-year-2165051

Retail Sales Vary Across the U.S.

June 11, 2009

Retailers in cities across the U.S. reported the economic clouds of the last few months could be parting, but consumers remained focused on necessary purchases instead of luxuries, according to the Federal Reserve Board’s Beige Book released Wednesday.

Anecdotal accounts in the report point to a leveling out of sales pressures and in some regions slight improvements, as the economic downturn appeared to moderate. Overall, the 12 districts included in the Beige Book said economic conditions were still difficult, but five districts said the downward trend was slowing and several said their outlook had improved.

Retailers in New York, Minneapolis and Dallas reported slightly improved sales in recent weeks. Reports from Boston, Philadelphia, San Francisco, Cleveland, Kansas City and Atlanta were flat or mixed. Several districts said discount retailers continued to perform better than other stores.

Sales of luxury goods and discretionary purchases were sluggish in most districts. Retailers in New York, Philadelphia, Chicago, Dallas, San Francisco and Kansas City reported consumers were favoring less expensive or discount lines and stores over premium brands and luxury products.

In Philadelphia, merchants gave conflicting reports, but generally indicated they do not expect sales to improve during the rest of 2009. The chief executive officer of a large chain store said, “We are a value proposition, so we are benefitting from uncertain economic times.” Another executive at a high-fashion chain said, “Luxury is in the tank.”

Sales in Kansas City remained steady, according to retailers in the district, but had not yet recovered compared to last year. Sales of basic apparel items increased, but demand for luxury goods and home furnishings was still lackluster, according to retailers in the area. Mall traffic was also slower.

Department stores and specialty retailers in San Francisco reported weak overall demand. One retailer in New York said price discounting had reared its head again recently.

In contrast, most retailers in Boston reported a modest sales increase over the same period a year earlier despite continued pressures on other sectors in the district.

For further information, visit: http://www.wwd.com/business-news/gap-remodeling-50-old-navy-units-2164602#/article/business-news/beige-book-notes-some-retail-improvement-2164427?navSection=business-news

Slowing Down The Economy’s Recovery

June 11, 2009

The number of people receiving unemployment benefits has set another record, a development likely to weigh on consumer spending and slow the economy’s recovery.

While retail sales rose in May, the increase resulted largely from a spike in gasoline prices and higher auto sales, according to a report from the Commerce Department. Overall, the retail report Thursday showed consumers remain reluctant to spend, economists said.

“The jobs picture continues to be one of the most significant challenges to the economy,” said Dean Curnutt, president of Macro Risk Advisors, a financial strategy firm. “It’s very difficult to be bullish on consumer spending when you’re looking at unemployment rates that are so high.”

The number of people continuing to claim benefits exceeded 6.8 million in the week ending May 30, the Labor Department said Thursday. That was the 19th straight weekly record, after a drop last week was revised to an increase.

And that doesn’t include about 2.4 million people receiving benefits through federal and state extended programs, which can add up to 53 weeks to the 26 weeks provided by most states. That means about 8.5 million people received unemployment insurance in the week ending May 23, the latest data available, triple the total of a year ago.

The unemployment rate jumped to 9.4 percent in May, a 25-year high, as employers cut 345,000 jobs. Some economists project the rate could near 11 percent by the middle of next year.

More encouraging was a drop in initial jobless claims to a seasonally-adjusted 601,000 last week, which was below analysts’ expectations and the lowest level since January.

New jobless claims are a measure of the pace of layoffs and are seen as a timely, if volatile, indicator of the economy’s health. The huge increase in the unemployment benefit rolls is a sign that even as layoffs slow, companies remain reluctant to hire.

The weak job market, along with dwindling home values and falling stock portfolios, likely will restrain consumer spending for months, economists said.

That’s a big reason why many analysts and the Federal Reserve expect any economic recovery later this year to be slow.

Consumer spending powers about 70 percent of the economy and has been key to past recoveries. When Americans sharply reversed their free-spending ways last year, the economy plunged into a steep recession, which is now the longest since World War II.

The Fed said Thursday that American households lost $1.33 trillion, or 2.6 percent, of their wealth in the first three months of the year. That caused household net worth to drop to the lowest level since the third quarter of 2004.

Tim Groves, a 39-year-old attorney in Providence, R.I., said his family’s spending has increased slightly from a few months ago but only because his wife did not lose some classes she teaches as they had feared.

“We’ve loosened up but that doesn’t necessarily mean we’re spending more,” Groves said. “We were cutting back a fair amount just preparing for that. We’re trying to keep the belt tight.”

Retail sales did rise 0.5 percent in May, the government said, the first increase in three months. But excluding autos, gas and other volatile categories, so-called “core” retail sales were flat compared with April.

Higher gas prices likely will restrain consumer spending in the next few months, said Paul Dales, U.S. economist at Capital Economics in Toronto. He estimates gas prices rose 10 percent in May and have jumped another 15 percent so far this month.

Still, Wall Street welcomed the drop in new jobless claims and growth in retail sales. The Dow Jones industrial average added nearly 32 points to 8,770.92, and broader indices also rose.

Many analysts expect layoffs to worsen the housing slump, as unemployment, rather than risky mortgages, becomes the main reason borrowers default on their loans. That will likely keep foreclosures elevated into 2010.

Foreclosure filings fell 6 percent in May from April, RealtyTrac Inc. said Thursday. More than 321,000 households received at least one foreclosure-related notice last month, 18 percent more than a year earlier.

Despite the drop from April, it was the third-highest monthly rate since the Irvine, Calif.-based foreclosure listing firm began its report in January 2005.

Also Thursday, the Commerce Department said businesses cut inventories 1.1 percent in April as they struggle to get stockpiles more in line with falling sales. Inventories have fallen for eight straight months, the longest stretch since there were 15 consecutive declines in 2001-2002, a period that covered the last recession. For further information, visit: http://www.google.com/hostednews/ap/article/ALeqM5gNiyJ905Ho0Ur96V2TQhsBX19lGwD98OMFS81

Predicting What The Future Holds For Retail

June 10, 2009

While some kids are still counting the days until the end of this school year, retail experts are looking ahead to the back-to-school shopping ritual as the first real test of whether the economy is recovering.

“In a recession, the consumer is generally the last one to leave the economy and the first one back,” said Marshal Cohen, chief retail analyst with research firm NPD Group.

“Consumers didn’t really start to pull back until last October,” he said. “Now they’ve gone through months of frugality and there’s so much pent-up demand out there.”

According to the National Retail Federation, back-to school shopping is typically merchants’ second-biggest selling period after the holiday gift-buying months of November and December.

If back-to-school sales are a disaster, then Cohen warns that the economy is headed for a “long period of continued challenge.”

But if he’s guessed correctly, and this tidal wave of pent-up demand hits retail stores from mid-summer through September, “it could be the first credible sign that consumers are feeling a little bit OK about spending again,” he said.

That’s significant because consumer spending fuels two-thirds of the economy. And the economy could use the help: the nation’s gross domestic product declined at a 5.7% annual rate in the first quarter of this year, the third straight quarter of decline.

“Parents cannot not spend on their kids,” Cohen said. “They will loosen up their purses and wallets because they won’t send their kids to school with a 2-year-old backpack.”

Still, he said budget-conscious Americans will show a preference for buying “necessities.”

Retailers should also benefit from last year’s easier comparisons for the season. “Back-to-school sales were very late last year. So most merchants are up against much softer year-over-year numbers,” Cohen said.

Catalyst for holiday sales: Cohen and others pointed to a historical correlation between back-to-school sales trends and retailers’ performance over the year-end holidays, which usually account for as much as 50% of stores’ profits and sales for the entire year.

“For me, back-to-school is always the early indicator of the holiday season,” Cohen said.

Ken Perkins, president of sales tracking firm Retail Metrics, agreed. “If back-to-school [sales] are decent, it could become a catalyst for holiday sales,” he said.

“Traditionally back-to-school tends to post stronger same-store sales than the holiday season,” said Jharonne Martis, senior research analyst with Thomson Reuters, which tracks monthly same-store sales for 30 large national chains including Target, Macy’s, J.C. Penney and Costco.

Same-store sales, which measure sales at stores open at least a year, are a key gauge of a retailer’s performance.

Conversely, weakness in sales of school merchandise doesn’t bode well for holiday sales. That was the case last year when same-store sales rose 1.9% over July and August combined, down from 3% in 2007. Subsequently, holiday sales fell 1.5% in 2008 after rising 2.3% the prior year.

Martis said many parents will also “definitely wait” for sales tax breaks before they start shopping for school products.

Last year, 16 states — including Texas, Virginia and Georgia — offered tax-free shopping days, mostly in August, on clothing, computers and general school supplies.

Martis expects three retailers to do particularly well this back-to-school season — Wal-Mart, Aeropostale and Buckle.

“Consumers will go to Wal-Mart for its discount prices,” Martis said. Aeropostale and trendy merchandise seller Buckle will resonate most with teen shoppers, she added.

Clouds linger: But at least one industry watcher isn’t seeing any signs of optimism on the horizon.

Citing tightness in the credit market, Burt Flickinger, managing director of consulting firm Strategic Resource Group, expects back-to-school sales will be 4% to 5% lower than last year.

That said, Flickinger expects holiday sales “will be OK.”

Besides credit issues, Flickinger anticipates higher gas, food and drug prices later this year will put a crimp on sales of discretionary items.

“Consumers are facing much more day-to-day inflation during summer than in spring,” Flickinger said. “I’ve talked to many retail CEOs, and they are not seeing what analysts are seeing.”

“There’s high unemployment, including high teen unemployment. Credit lines are being cut by stores and credit card companies,” he said. “For back-to-school, students and parents will only buy what is needed.”

For further information, visit: http://money.cnn.com/2009/06/10/news/economy/retail_backtoschool/

The Recession: The Reason Behind Retail Slowdown

June 9, 2009

Retail sales in the Tri-Cities declined during the first quarter of 2009 giving the region no respite from the deepening recession.

According to ETSU economists Seb Hipple Kingsport’s sales were down 2.8 percent, Johnson City sales declined by 5.2 percent. Retail sales in Bristol were off 12.3 percent for the quarter.

In comparison, real sales were down 8.9% in Tennessee and 10.2% in the nation as a whole.
The data isn’t much better for the Combined Statistical Area where dollar sales fell sharply – 7.8% to $1,353 million. Adjusted for inflation, retail volume in the Tri-Cities metro area was 7.8% below the same period in 2008.

Hipple’s report says other metro areas of East Tennessee reported the same dismal results during the first quarter. Chattanooga MSA sales revenues fell 8.8% to $1,430 million, while Knoxville MSA sales were down 11.3% to $2,337 million.

In his analysis Hipple says, “during the first quarter, the U.S. economy and the regional economy continued to descend into the worst business contraction in a generation. This appears in all of the various economic indicators – employment, unemployment, output, government deficits, as well as the retail sales covered in this report. And the second quarter will be worse than the first. The economic and business news will continue to be largely negative in the coming months.

“That said, the economy appears to be nearing the bottom point (the “trough”) of this business cycle. The various bits of good news are being called “green sprouts”. What are some significant sprouts? One important item is that the toxic assets in the financial system have declined as the underlying bad mortgages are ended through foreclosure, or refinanced to an interest rate the borrowers can handle. The ongoing restructuring of the financial system is bearing results as routine lending has been resumed. And the residential construction market is showing some signs of revival.

“Most forecasters expect the economic recovery to begin during the third and fourth quarters. But the expectation is that growth in output and retail sales and employment will be modest, and that the level of unemployment and the unemployment rate will continue to increase well into 2010. The jobless rate will exceed ten percent under this scenario.

“Where does this bleak outlook come from? In the last two recessions of 1990-91 and 2001, the recovery phase was very weak and did not create enough new jobs to reduce unemployment – in fact, the unemployment rate continued to increase for more than a year after the end of the recession. These two business cycles were described as “L” shaped since there was no strong recovery.

“The expectation is that the recovery from the 2008-09 recession will also be weak. And since this recession has been very severe (like the 1981-82 downturn), that slow recovery will be starting from a much lower level of economic activity. So it may be 2011 or 2012 before we once again see more normal levels of production and retail activity and employment.

“But there is an alternative scenario that looks to a more vigorous recovery phase (like the recovery in 1982 and 1983). The driving element here is the extraordinary amount of monetary and fiscal stimulus that the central bank and the federal government have pumped into the economy to fend off what was a very real risk of another Great Depression.

“The example here is the deficit spending that the government launched in 1940 and 1941 due to World War II. The unemployment rate going into 1940 was still over ten percent. With the economic stimulus linked to the war, the jobless rate dropped dramatically. While the stimulus today is not at those wartime levels, it is the highest we have ever seen in a peacetime year.”

For further information, visit: http://www.timesnews.net/article.php?id=9014372