A nation under economic stress

How did it get this bad?

For two years, economic turmoil in the United States throbbed from a few areas of isolated distress – dark bruises on a national map that was otherwise unscarred.

Even the deflating housing bubble was confined mostly to areas like California’s inland valleys, Las Vegas and Florida, while manufacturing communities in Michigan and the South struggled to keep workers in their jobs.

The Associated Press Economic Stress Map, a new snapshot of our national pain, shows that the economy was hurting, but it didn’t demand a nationwide lifestyle adjustment.

Then came the autumn of 2008. Banks failed, Congress poured billions into hopeful fixes, the Dow Jones industrial average plummeted, and soon the regional misery began expanding nationwide. Over the next six months, it spread along Interstate 5 in California, spilled out of Michigan into the rest of the Midwest, and sprouted like kudzu throughout the South. Only recently have there been signs that the pace is slowing.

The Stress Index, which measures the recession’s relative impact on local economies, offers new insight into how this tipping point changed the course of the recession, spiraling the world’s wealthiest nation into an ongoing cycle of despair that has already seen millions of jobs and trillions of dollars lost.

“It was a major turning point, last October and November,” said Jackie Knafel, the auditor of Noble County, a manufacturing community in northern Indiana where the unemployment rate went from 9.5 percent last October to 17.5 percent in March.

“Before last fall, you heard about people being laid off … but you didn’t hear about plants closing … now it seems really to have affected everything.”

By the end of the holiday season, the infection had spread far beyond Wall Street, into Dallas, Ore., and other timber towns in the Pacific Northwest; to manufacturing pockets in the Midwest such as Elkhart, Ind., and Rockford, Ill.; to tourism hot spots such as Branson, Mo., and Ocean City, Md.; and into distribution hubs like Bullitt County, Ky., south of Louisville. It continued into 2009, but the pace seemed to slow a bit in March.

“I’m 50-something years old, and I don’t ever remember any recession being so widespread like it is right now,” Knafel said.

By now, the back story is well known. Beneath the distractions – robust housing prices, a Dow racing toward 14,000, two wars and a White House campaign – lurked a dangerous stew of reckless investments, consumer debt, record oil prices, excessive growth, soaring medical costs and millions of uninsured Americans.

Then, in just a matter of weeks, as Washington focused on banks and bailouts and politics in October, the Dow lost 25 percent of its value and credit markets were paralyzed.

Mark Vitner, senior economist at Wachovia Corp., likened the economy to a car speeding along a foggy mountain road, approaching a sharp curve. The collapse of Lehman Brothers in September sent the car off the side of the road and through the guardrail. The freefall lasted months.

“We are now hitting the treetops,” Vitner said, meaning the pace of the decline has now slowed.

The AP Economic Stress Index uses unemployment, bankruptcy and foreclosure rates from each U.S. county to calculate the economic impact of the recession on a scale of 1 to 100. The results are then plotted on the color-coded Stress Map to give a measure of how hard the recession has hit a county compared to all others.

In September 2008, 6.5 percent of the more than 3,000 U.S. counties had an index score higher than 10. The stress seemed to reach a peak in February, when almost 40 percent of the nation’s counties had an index number higher than 10. It dipped slightly in March to 38 percent as some seasonal workers returned to jobs.

Since the start of the recession in December 2007, Indiana’s Elkhart County saw the greatest reversal in fortune for counties larger than 25,000 residents, going from an index score of 6 in December 2007 to a score of 21 in March 2009. The county’s unemployment rate went from 4.7 percent at the start of the recession to 18.8 percent in March.

Imperial County, Calif., has the highest index number for counties bigger than 25,000, with an index score of 28.1 in March. Like some other spots across the country, Imperial County is reporting depression-like numbers: More than 25 percent of workers are out of a job, there’s one foreclosure for every 31 homes in the county and the number of residents filing for bankruptcy is soaring.

“That’s a kind of weakness we haven’t seen in decades. It’s inescapable,” Vitner said.

While it was foreclosures that helped push the nation off the economic precipice, unemployment has deepened the slide, particularly since the autumn tipping point.

Among the first manufacturing jobs to go were those with direct ties to the housing boom, from light-switch manufacturers to furniture producers. Over the next six months, millions of jobs in nearly every other industry followed suit.

In Oregon’s timber towns, which are dependent on the housing market, especially that of neighboring California, mills have been cutting shifts and workers in a desperate bid to slash costs. In March, the timber and wood products company Weyerhaeuser Co. shuttered its mill in Dallas, Ore.

“It’s going to be devastating on the community,” said Ed Trask, who worked at the mill for more than four decades. “What’s going to happen?”

Trask paused, and then answered his own question: “It’s going to be silence.”

Since the recession began, 5.1 million jobs have been lost, including 3.3 million since November. By comparison, President Barack Obama’s stimulus plan promises to save or create 3.5 million jobs.

The jump in unemployment since the fall has also driven a fresh round of foreclosures, including in markets once thought to be immune.

Of the seven states that saw the fastest rise in unemployment rates between August and December, five also saw mortgage delinquency rates rise 20 percent or more, including Maine, Washington and Oregon. The only two that didn’t – Michigan and Indiana – already had some of the highest delinquency rates in the nation.

The states that saw the highest jump in foreclosure activity from the third quarter of 2008 to the first quarter of this year were in the Pacific Northwest and parts of the South.

Vitner said he thinks foreclosures connected to the subprime lending crisis are cresting now.

But he expects a second wave of foreclosures linked to unemployment to crest sometime next year. This is because foreclosure filings often come several months after a borrower’s first missed payment, and, because of a range of efforts to halt foreclosures, many filings have been delayed.

“There’s a good chance that we don’t see the end of the credit issues in the economy until sometime in 2011 or early in 2012,” Vitner said. “It’s going to be a long road to recovery here, and the programs we have in place today may actually drag it out a little bit.”