Our new year will continue to bring challenges in the financial world. As I look ahead, I do not project an economic turnaround to take place this year. Before I give my outlook, let me tell you what everyone needs to be doing during 2009.
1. Trust the Lord, not only in the area of finances, but in every area of your life. As stewards we must remember that all our resources belong to God. (Psalm 24:1)
2. Don’t let all the negative financial information prevent you from generously supporting God’s work during the year. (2 Corinthians 8:1 – 9:15) Our giving is not based upon the financial outlook, but upon our commitment to support God’s work, no matter what the outlook.
3. Take time to plan. (Proverbs 21:5) I am convinced that most Americans spend little or no time evaluating and planning their finances. Take the time to sit down one evening for several hours and put together what I call a Money MAP. If you need a good resource to help you plan, check out our Money MAP Pack on our web site. Click here for ordering information.
4. Commit to get out of debt or to reduce your debt in 2009. No matter what the economic outlook, reducing or getting out of debt is always a great plan. However, in turbulent financial times, reducing your debt becomes significantly more important. (Proverbs 22:7)
5. Build up your cash reserves for financial emergencies, such as being laid off your job. If you become unemployed this year you will need some cash reserves to live on. If you have no cash reserves, your only option is to live on credit card debt.
6. Build up your cash reserves for investing in the future. (Proverbs 6:6-7)
7. Live within your God-given means. Don’t spend more than you are earning. This sounds like a simple concept, yet many Americans live on 110% of their income every year. (Proverbs 27:23-27)
Before I get into the details of the 2009 outlook, I need to make a few comments. First of all, I am not a pessimist, but a realist. I have been criticized by many readers for taking such a negative perspective on the economy. I disagree with their perspective because I view my role as reporting and commenting on the facts. If the facts say we had record home foreclosures in 2008 of 3.1 million, I am not going to say “the housing market looks positive.” The wise man studies the facts and makes decisions based upon what he knows to be true. Only the fool ignores the facts and put his head in the sand hoping the problems will simply go away.
I am not a prophet so I don’t know the future, but for what it is worth, here is my 2009 outlook.
Interest rates: Remain Low
The Federal Reserve cut rates to 0.25% during 2008. I had predicted that the Fed would consistently lower rates during 2008. There is really not much more room for them to cut rates during 2009. When can we expect rates to increase? Rates will begin to increase only once the economy begins to grow, and that will not be during 2009. I would project our first interest rate increase by the Fed would come in mid to late 2010, if even then.
Money Markets, CD and bond interest rates: Low
As interest rates have gone down so did interest rate returns for money markets, CDs and bonds. For example, if a person has $50,000 invested in a money market or CD, and the interest rate is 5%, the interest earned during the year is $2,500. If interest rates drop to 0.50% the interest earned becomes $250. You can expect low or practically 0% returns for all of 2009 if you have funds invested in a money market account. One year CD rates will remain in the 1.5% to 2.5% range for most of the year. Those hurt the most by the decrease in interest rates are usually senior citizens living on interest from their CDs or money market accounts.
Stock Market: roller coaster ride
Expect another wild ride in 2009. Be prepared for some of the biggest single day Dow Jones gains and losses – just like we experienced during 2008. Let’s look at what happened during the month of October in 2008. Oct 9: -678.91 (-7.33%); Oct 13: +936.42 (+11.08%); Oct 15: -733.08 (-7.87%); Oct. 28: +889.35 (+10.88%). These point gains and losses represent the most single day gains and losses in the history of the Dow Jones. The Dow Jones was down approximately 34% in 2008, closing at 8,776. This represents the worst year (down %) for the Dow Jones since 1931. The all-time high for the Dow Jones was 14,164 on October 9, 2007. This means that the Dow Jones on December 31, 2008 was down 38% from the all-time high.
Don’t always look at the point gain or drop to determine the magnitude of the gain or loss. What you need to focus on is the percent of gain or loss for the day. For example, in 1987 when the Dow Jones was at 2,246 at the opening bell on October 19, 1987 and closed at 1,738, for a point drop of 508 points in one day, that represented a drop of about 23% in one day. If the Dow Jones is at 10,000 and drops 500 points in one day, that would represent a decline of only 5%, not 23%! Five percent is a significant one day drop, but nothing like a drop of 23% in a single day.
Retail Sales: lower
Back in early November 2008, I began predicting that we would see numerous store closing during the first three months of 2009. All the data was pointing in that direction. Many retail businesses earn a large portion of their profits for the entire year during November and December. These profits help them to survive the next 10 months until November rolls around again. Without record retail sales, many stores do not have the cash to survive the next year. As you read the news each day, we are seeing massive store closings and layoffs. The most recent announcement is Circuit City which is closing all 567 stores nationwide. Until we see the economy stabilize, and people begin to spend money, retail sales will remain lower.
Sub-Prime Mortgages: problems will continue
The mortgage mess clean up has begun but it will take at least another 12-18 months (or more) for us to move beyond the mess. Why more than 12 months? That leads me to my next point: Foreclosures.
Foreclosures: Increase
Foreclosures were up 81% in 2008 compared to 2007. They are up 226% when compared to 2006. There were more than 3.1 million foreclosure filings during 2008. It is very likely that we will exceed 3.1 million foreclosure filings during 2009. There is not enough good housing news out there for me to project a better outcome in 2009 than we had in 2008. There are reports that the majority of the bank-owned homes have not been posted on MLS (multiple listing service). Many banks are not listing their homes for sale because when they list the property they have to take markdowns on the bank books. Not knowing the number of homes actually owned by banks that are not on the market creates more problems. The magnitude of the housing surplus could be greater than we know. As these bank homes are put on the market, the foreclosure inventory/supply will greatly increase. We already have a surplus of over 1 million homes on the market nationwide. What will the inventory level become when all the bank-owned homes hit the market?
There is an alarming and disturbing report out that some home owners are intentionally falling behind on mortgage payments in order to qualify for government bailout money. This is a disgrace and shows a dangerous “government dependence-type attitude” developing in our nation. It is not the role of the federal government to pay your personal mortgage or to bail your company out of financial trouble.
Oil Prices: stable to increasing
Of all the projections, this one has presented me with the greatest challenge. If you will remember in July 2008, crude oil was at $147 per barrel. At that time it was not unrealistic that oil potentially would reach $200 per barrel by the end of 2008. It appears that $4.00 per gallon gasoline was the turning point for American consumers. Gasoline consumption began to decrease at about this same time. Americans began to drive less and demand decreased. As demand decreased, oil prices fell. Supply and demand theories do work. The reason I say oil prices will stabilize is because I do not see consumer demand greatly increasing during 2009 for gasoline. In recessions people spend less and drive their cars less in order to save money.
During 2009 we will probable see crude oil in the $30 to $65 range. What we cannot project or control is what the Middle East oil nations do concerning production. If they cut oil productions
drastically, yes we could see $100+ oil even if consumer demand is low.
Unemployment: Increase
At the end of 2008, unemployment numbers were at 7.2%. With the multitude of store closings to take place during 2009, and uncertainty in the auto industry, we could see unemployment reach 8.5% to double digits during 2009. A major factor in how high the numbers will go in 2009 depends upon how deep the recession goes and how much people are spending during the year. I believe we will see unemployment in the 9% range (give or take 1/2 %).
Home Values: lower
Nationally, home values have fallen more than 21%. In Los Angeles, San Francisco, and Miami home values are down 30% or more. Most reports show a 40% decline in some areas of Phoenix and Las Vegas.
Some estimate that we have a surplus of over 1-2 million homes on the market. Over four million homes are for sale, and the norm is three million. Too many homes on the market result in falling prices. This surplus is not going to go away in 2009. If you are looking to purchase a home to live in or for an investment you should be able to find great deals in 2009 and even into 2010.
Some are projecting that it might take decades for housing prices to fully recover. I disagree with their projections. Once the housing mortgage mess is cleaned up, and the surplus of homes is off the market, we should see home values begin to rise. Not at the same rate as the past 15 years, but we will see home values rise. If we do see home values escalate like we saw between 2000 and 2007, we should become concerned. Steady home value increases are healthy, rapid increases prove to be harmful to the economy.
Mortgage Rates: steady or slightly lower
Fixed mortgage rates for a 30 year mortgage are about 5%. Fixed mortgage rates for a 15 year are about 4.5%. The Fed lowered the discount rate to 0.25% in 2008. Mortgage interest rates do not always drop when the Fed lowers interest rates, but they usually do go down after the Fed lowers rates. With that said, the Fed only has 0.25% to lower rates again, before they hit 0%.
Mortgage rates are at a 38 year low. Could they go lower? It’s possible. However, I don’t see rates going below 4%. Could I be wrong? Yes. If you can lock in at a rate at 4.5% for a 15 year that would be great in my opinion. Some might want to wait and see if they will decrease to 4%. I would take the current offer of 4.5% and be very happy. If you presently have an adjustable rate mortgage (ARM), now is a great time to refinance and lock in a fixed rate.
Recession: Will continue through 2009
We are in a recession and it will continue through 2009 and into 2010. It is hard to tell how long the recession will last, but the hard data does not show the recession ending during 2009. We will probably have negative GNP numbers for all four quarters in 2009.
Availability of Credit: Increase
It is obvious that our federal government is going to do everything in its power to get the credit flowing again! You have heard that the credit markets are frozen and the banks are only lending money to those who don’t really need it. The federal government has made it clear that the government checkbook is open and they are willing to write the checks to “unfreeze” the credit markets. I disagree with the action of the federal government, but we will see the credit market free up during 2009. Money will become available in 2009 for car loans, line of credit, home equity loans, consumer debt, and home mortgages. Our economy is too dependent on credit and the government will continue to pump money into the system until banks begin lending again. We should become very concerned when the government begins telling lenders, “we will back your loans, just go out there and make loans.” Sound unrealistic? Not really, based upon what we have seen the government do since March 2008!
Identity Theft: On rise
All reports indicate that Identity Theft continues to be on the rise. To make sure your identity has not been stolen -- be sure you are receiving your free credit report from each of the three credit reporting bureaus. There is only one official web site to use. www.annualcreditreport.com All other sites are either trying to sell you something or a scam. Federal law requires that each credit report company provide you with one free report every 12 months. I recommend you order your first free report from the first company (on the list of three companies) in January, order the second report from the second company on the list in May and order the third report from the third company on the list in September. If you order all three at the same time you will have to wait 12 months before you can check your report again. Your goal is to be able to monitor your credit report for unauthorized activity all during the year.
Federal Budget: Alarming levels! Unprecedented!
Expect unprecedented deficit spending during 2009. It appears congress (Democratic or Republican) has no interest in balancing the budget. You can expect the federal budget deficit (spening more than you take in) to be in the range of $1.0 to $1.5 trillion. To put this unprecedented number into context, you have to understand that the largest deficit in our nation’s history was approximately $450 billion.
Federal Debt: On rise
Presently our national debt is just over $10.6 trillion. If every man, woman and child in the U.S. were asked to pay their share of the U.S. National debt it would be over $30,000. That is $30,000 for each person or $120,000 for a family of four. Over the last 25 years our debt has been growing at a rate of 8.9%. If this trend continues our nation will owe approximately $16 trillion in 5 years and $25 trillion in just 10 years. This year alone our national debt will increase approximately 10%! That is in one year. It took our nation over 230 years to reach $10 trillion in debt, and in just one year our nation will increase our debt over $1 trillion or 10%! Our nation is on an unsustainable path.
Credit Card Debt: higher
The average American family owes more than $10,000 in credit card debt that is never paid off from month to month. In hard financial times, families tend to use credit cards to help meet family needs. Since most believe that 2009 will bring challenging days, expect credit card debt to increase. Most American families are already stressed out financially and it will only get worse during 2009. With unemployment increasing in 2009 and family savings at miminun levels, the only option will be to use credit cards for living expenses or to tap into or deplete 401(k) retirement funds. (Just for your information, the average American family had $1,500 in on-going credit card debt in 1990.)
Most Interesting Thing to Watch in 2009: Will money market funds maintain a steady $1 per share value?
During 2009 be watching money market funds. If the share value remains stable at $1.00 per share, that will be great news in 2009. If several of the funds begin to “break the buck” meaning that one share does not equal $1.00 anymore, that indicates serious trouble with the economy. Presently so much money is invested in money market accounts, that if there becomes a run or panic on money market funds, this could create serious problems in the financial markets. For more information about the government stepping in and insuring money market funds in September 2008, read my economic update dated October 23, 2008. You will find it on my web site at www.foundationsforliving.org.
Your Financial House in 2009?
If your financial house is not in order, I trust that my realistic financial outlook will motivate you to make some changes during 2009. Keep the faith and never give up. Our ultimate trust and security is in God. Work hard to be a faithful manager over the resources God has entrusted to you. Invest hours not minutes in overseeing your financial resources. Help your friends and family members to put their financial house in order (if they need to). You will never go wrong in paying down your debt, living within your God-given financial means.
For additional helpful articles during 2009, be sure to check our web site at www.foundationsforliving.org.
For resources to help you be a faithful money manager during 2009 visit our resource center at www.foundationsforliving.org and look for our Money MAP Pack. This resource will help you get on the right financial road.
©2009 Ethan Pope