Economic Anomalies

Corporate profits jumped 46.6%, exports expanded 20.6%, and GDP is up 5.5% in the two years since the recession said a Wall Street Journal article, but to most people, the economy is just limping along. US unemployment is at 9.1% and US household debt -- in part due to mortgage woes caused by unemployment and an 8.8% drop in home prices -- is at 127% of annual incomes, far higher than the average 84% of the 1990s and the 90% financial line in the sand suitable for economic expansion. In order to get back to the go-go 1990s level, US households need to pay off $3.3 trillion of that debt, raise incomes $3.9 trillion, or some combination of the two.

Worse, the Federal Reserve noted banks are lending less than before the recession. Home equity lines of credit, as you can imagine, dropped 13.0% from pre-recession $1.33 trillion to current $1.15 trillion and credit card lines of credit dropped 11.5% from $3.04 trillion to $2.69 trillion.

Reduced credit is strangling the recovery. According to the Summer 2011 Pepperdine Private Capital Markets Project study of 1221 privately-held businesses, 95% of business owner remain enthusiastic about executing growth strategies, but only 53% said that they have the necessary financial resources to successfully execute their expansion plans. Banks denied approximately 60% of loan applications over the last six months; angel investors funded just one business plan out of 25 reviewed; venture capitalists funded just one business plan of 80 reviewed; and private equity funds invested in just one business plan out of approximately 150 reviewed. Then again, the same study found 61% of bankers said they rejecting loan applications they ordinarily would have approved in order to satisfy federal regulators.

As for the government, the financial stimulus, including Treasury Department purchases of $1.4 trillion in mortgage bonds and $900 billion in Treasury bonds, plus $830 billion stimulus package of 2009, has run its course. It may have stabilized the economy, but the government is running out of sleight of hand financial tricks to prod the economy into high gear and is suffering its own brand of massive debt.

The good news? A Pepperdine Investment Bankers survey found 85% of respondents thought deal flow would increase over the next 12 months, but with a further tightening of due diligence efforts by banks (31.7%) in the face of improving conditions. Over 48% of angel investor respondents expected the quality of companies seeking investment over the next 12 months to increase and nearly 70% expected the demand for business investment to also increase over the next 12 months.

Best guess by economists? A long, slow slog of a summer with some increased activity in the fall and winter. Then again, they said that last year, so it may be years before consumers wean themselves off credit card and home equity splurges.