Economist Predicts Dip Enroute to Recovery

Some experts claim the U.S. economy is entering a so-called “new normal,” but “there is nothing new about it,” says economist Tom Webb, pointing to past trends and indicating hard times aren't fully over yet.

He is chief economist for the Manheim wholesale auto-auction chain but his outlook reaches well beyond used cars.

What kind of recovery is coming? It won't be V- or U- or L-shaped, Webb predicts, citing various letters in economists' alphabet soup of illustrations.

Nor will it be the double-dip recession that many have foretold. Webb foresees an “upward slanted W.” He believes the country will reenter recession (the second half of the W) before reaching the previous peak.

Contrary to what some analysts have indicated, severe “financial crisis leaves lasting scars” and “de-leveraging is a slow and painful process,” he says.

He predicts a second dip in housing, though not nearly as bad, perhaps 5%, as before. There's an “overhang of foreclosures,” accompanied by “pressure on pricing,” he says.

Lingering weakness in the labor market remains a prime factor. Initial jobless claims improved this fall, following a peak in 2009; but Webb believes there's “too big of a hill to climb.”

From peak to trough, America lost 6.1% of its labor force (8.1 million jobs). Today, despite substantial population growth, the same number of people is employed as in December 1999.

Almost 7 million people have been unemployed for six months or more. “Most likely your job's not going to come back,” Webb says of those people. Only in the midwestern Wheat Belt has unemployment not been a dire issue.

Personal income has recovered since 2009, but remains well short of the peak. Six consecutive quarters of declines in household net worth are unprecedented, down by $12.3 trillion from the peak period, revealing “how big a paper boom we had in housing.”

Recently, there's been a “tremendous reduction in mortgage debt outstanding,” but most of the debtors simply “walked away.” Credit card debt also is down, but only a portion of the reduction stems from more prudent personal financial behavior.

Repos are down 7.5 percent this year. “Consumers have done a good job of paying their auto loans,” Webb says. A troubled customer might walk away from his or her home loan, yet continue to pay on the car.

Average mileage of used cars has been rising. In 2006, compact cars sold at auction had an average of 51,000 miles on their odometers. Today, it's 65,000 miles.

Used-vehicle sales should reach their previous peak long before new-vehicle sales do, Webb says.

Webb advised dealers to remember that the “typical used-vehicle buyer is representative of mainstream America.” Typical new-vehicle buyers are not. He also notes “both markets are totally driven by monthly payment.”