Fed chief sees weak recovery

By Thomas Oliver

The Atlanta Journal-Constitution

Atlanta Federal Reserve President Dennis Lockhart is a worried man. If he weren’t a worrier by nature, his job would have made him one.

Two days before he took over the Atlanta Fed on March 1, 2007, he witnessed lightning strikes emanating from storm clouds that had been gathering across the country: Freddie Mac and Fannie Mae announced they would no longer buy subprime mortgages and mortgage-backed securities.

A month later, the first of the subprime mortgage lenders filed for bankruptcy. That summer, Bear Sterns started wobbling.

The rest is a history we are all too familiar with.

Today, as Lockhart surveys the Atlanta district, which includes Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee, he sees improvements that constitute the beginnings of a recovery. But he worries about a protracted period of high unemployment.

He notes the average manufacturing workweek has fallen below 40 hours for the first time in 26 years. That the number of part-time workers who’d rather work full time has increased more in this recession than in any since government started tracking that information.

Those measurements tell Lockhart, he explained during our interview, that businesses remain cautious and “have learned during these hard time how to operate with fewer employees and lower inventories.”

Lockhart worries about the more comprehensive unemployment rate that many in government prefer we ignore. Rather than the headline rate of 9.7 percent, which includes only those out of work souls who recently looked for a job, Lockhart will point to the rate that includes those who would like a job but have stopped looking, plus those who are working part-time but would prefer full-time work.

That rate is 16.8 percent.

The difference is enormous: 73 percent higher, or 10.6 million more under-or-unemployed Americans, for a total of 25.2 million.

The magnitude of suffering that represents is one reason Lockhart thinks it would be a serious mistake for anyone to think we’ll ever return to those go-go days before the recession.

Not only are consumers battle-weary, so are banks. The financial system isn’t going to support the consumption pattern that saw us using home equity lines of credit to finance vacations, cars, home entertainment systems and wardrobes worthy of a celebrity.

Rather than returning to days of easy credit, Lockhart sees us rebuilding a more fundamental economy. One based on a better balance between consumption and investment. Less leveraged.

Particularly at the household level.

What really worries Lockhart is commercial real estate. He knows that billions of loans are coming due next year and the next. And the collateral for those loans – the projects themselves – has dropped in value due to rising vacancies and lowered rents.

There’s some reason to hope that, as the economy improves, those valuations will stabilize and banks won’t be forced to write down the loans, which could wreck any recovery and destabilize the financial system once again.

“I worry about that the most,” says Lockhart.

Thomas Oliver writes a business column. He can be reached 
at toliver.writeright@gmail.com