2/15/2009

By DUANE SCHRAG
Salina Journal

Change really has arrived.

In 2008, the Dow Jones Industrial Average broke 13,000 in May. Gasoline zoomed from $2.78 a gallon in February to $4.09 in July. Wheat broke $12 a bushel, corn went over $7 and beans flirted with $15.

By the end of the year the U.S. economy was officially tanking. The Dow fell below 7,600 in November, gasoline in Salina went for as little as $1.51 a gallon, wheat was back under $6. New home construction nationally in December was 45 percent below the previous year and housing starts for the year were the worst since the federal government started tracking the data in 1959.

Even oil companies -- oil companies! -- lost money in the fourth quarter. In fact, Conoco-Phillips lost money on the year.

This was change many have never seen.

"Most working adults today have not had an experience with an economic recession," said Mark Hirschey, the Anderson W. Chandler professor of business at the University of Kansas. More than half of the residents of Saline County weren't even in high school when the last serious recession -- in the early 1980s -- hit.

"You have a lot of untested decision makers that are grappling with their first economic recession," Hirschey said.

Starting this week, the Salina Journal is publishing its annual look at the past year, and exploring ways the community is reinventing itself to adapt to changing times. The first installment of "Yes, We Can, Salina!" is inserted in today's issue, and will appear in each of the next three Sunday issues.

Not ground zero

Perhaps the best news for Salina area residents is that central Kansas isn't ground zero for the recession. The shrinking economy is making its presence felt here, to be sure, but not nearly as starkly.

In fact, strong commodity prices, coupled with a diverse local economy, made 2008 a good year for many businesses.

Several local banks -- Sunflower Bank, UMB Bank, Bennington State Bank, Bank of Tescott, Solomon State Bank -- posted record profits for the year.

And while several manufacturing businesses announced cutbacks over the year, mega-retailer Kohl's announced plans to build a new store in Salina. The store, located on South Ninth just south of the Mid State Plaza, is set to open in March.

But many households are being pinched. The county's unemployment rate crept up to 3.8 percent, more than 2007 (3.3 percent) or 2006 (3.7 percent), but below the levels reached in the wake of the 2001-02 recession. From 2002 to 2005, the unemployment rate ranged from 4.1 percent to 4.9 percent, the worst since at least 1990.

While wages paid by private sector employers in Salina County have increased by 20 percent since 2000, that only keeps pace with inflation. In fact, when adjusted for inflation, local private sector wages fell every year between 2000 and 2005. They rose in 2006 and 2007, returning to the 2000 level.

The number of households receiving food stamps in Saline County has been climbing more or less steadily since 2000 (see chart).

Correction was inevitable

Some of the factors that spectacularly contributed to the financial collapse have been widely discussed -- the mountains of toxic debt that financial powerhouses eagerly traded for enormous profits, for example.

But in some ways, the fallout from such reckless behavior isn't well-understood.

"This is a chicken-and-egg question," said Robert DeYoung, Capital Federal professor of finance at the University of Kansas. "It is not always clear what starts a recession."

What economists can say with some certainty is that a market correction was inevitable. The country's economic engine is fueled largely -- more than 70 percent -- by retail spending: people buying things they might or might not be able to live without. Sometimes they didn't have the money to buy those things, and so they started saving less and borrowing more.

"The fact of the matter is that spending by consumers and local governments have exceeded their ability," Hirschey said. "And so far, the markets were willing to lend us the money."

For a while, it worked like magic. All that spending created jobs, even as it gave people new stuff.

"We've been consuming more than in the past," DeYoung notes. "Some households increased their standard of living by borrowing, some by saving less."

Spending more, saving less

Back in 1984, Americans were putting more than 10 percent of their annual income into savings accounts; by 2007, that had fallen to half of 1 percent. Over the same period, household debt rose from 16.5 percent of annual income to almost 25 percent.

One very popular way to get more money was by refinancing homes.

"A number of folks started using their house as an ATM," says Dan Koester, an economics professor at Kansas State University. "People started looking at that as a secondary source of income."

But just as a Ponzi scheme unravels when the injection of new money stops, the economy crashed when the borrowing stopped.

"Now, markets aren't willing to lend us the money, so people have to cut back their expenditures to fit what their income is," Herschey said. "And for some consumers that's a real sharp retrenchment."

The slowdown has a domino effect. Economic uncertainty prompts prudent people to put the discretion back into discretionary spending, which leads to more job losses, which increases economic uncertainty. Economists refer to this as the paradox of thrift.

"Right now, we're in a situation where we've had this dramatic fall in spending," Koester said. "If everyone's saving -- which, all other things being equal, it tends to be a pretty good thing that people save more -- when they save during a kind of difficult time, it can create the type of ripple effect. Everyone's saving, people aren't buying things and we continue to see a lack of people hiring and expansions for firms."

While the consequences are very real -- unemployment nationally has passed 7 percent, and there is speculation it could reach 9 percent -- Hirschey says it's necessary.

"It's always scary when you see a recession," he says. "This is an important downturn ... but it's not atypical, and in a very real sense it's not a bad thing. It's the way the economy reinvents itself."

n Reporter Duane Schrag can be reached at 822-1422 or by e-mail at dschrag@salina.com.