WE ASK FIVE EXPERTS
Is the U.S. economy in recession?
Published: December 16, 2007
http://www.iht.com/articles/2007/12/16/opinion/edeconomy.php
Wait till next year
(1) Martin Feldstein
Although many people consider a two-quarter downturn of gross domestic product
to be a recession, the designation of recessions is done by the business-cycle
dating committee of my organization, the National Bureau of Economic Research.
The bureau defines a recession as a significant decline in economic activity
spread across the economy and lasting more than a few months. In judging
whether the economy is in recession, the committee looks at monthly data on
real income, employment, industrial production, and wholesale and retail sales.
Because monthly data for December will not be available until next year, we
cannot be sure whether the economy has turned down. The measure of personal
income for October suggests that the economy may have peaked and begun to
decline, but the data for employment and industrial production in November and
for sales in October show continued growth.
My judgment is that when we look back at December with the data released in
2008 we will conclude that the economy is not in recession now. There is no
doubt, however, that the economy is slowing. There is a substantial risk of a
recession in 2008. Whether that occurs will depend on a variety of forces,
including monetary policy and a possible fiscal stimulus.
** Martin Feldstein is a professor of economics at Harvard and the president of
the National Bureau of Economic Research.
Not if the exports save us
(2) Jason Furman
Looking only at standard macroeconomic statistics, you would think the U.S.
economy was in very good shape. Gross domestic product has grown at a 4.4
percent annual rate in the last six months, well above the historical average.
The price index for personal consumption, excluding the volatile food and
energy components, rose at a 1.6 percent annual rate over the same period, well
below the historical average.
But these statistics are like looking through a rearview mirror. The latest GDP
statistics go only through the end of September. They do not tell us where the
economy is today, let alone where it is heading.
Much of what we see outside the windshield, like falling house prices, rising
foreclosures, financial turmoil and oil prices near an inflation-adjusted
record, are more timely and troubling. But they shed light on only a small
fraction of what goes into producing GDP.
That millions of families are suffering is undeniable and requires a robust
policy response. But whether economic growth is turning negative, pushing the
economy into a recession that would hurt tens of millions more, remains unclear.
It is difficult to discern whether a recession is inevitable because we are in
the midst of a new type of financial crisis, one for which history has no map.
When banks sustain large losses, like the savings and loan association crisis
in the 1980s or the collapse of the Japanese bubble in the 1990s, the result is
a contraction in credit, a slowdown in consumption and investment, and a
recession.
But in the current turmoil, the banking sector (which started out with very
healthy capital balances) seems to be incurring losses that, while large,
appear to be far lower than those in previous crises. The losses are spread
across a range of poorly understood entities and investors, like hedge and
pension funds, around the globe. It is far from inevitable that this bad
financial news, the equivalent to the loss in assets seen in a typical bearish
day on Wall Street, will translate into a sustained reduction in economic
activity.
The one piece of good news, contrary to public perception, is the falling
dollar. It is increasing exports and slowing imports, thus helping to prop up
the U.S. economy.
Even if the economy avoids a recession, the road ahead will be rocky. A slowing
economy compounds the problems facing workers, who did not receive
inflation-adjusted wage gains even in the past few years of strong GDP growth.
As our focus necessarily shifts to the short-run task of averting a recession,
we should not forget the need for the progressive tax policies and robust
social insurance that are needed to help everyone share in the gains of a
strong economy.
** Jason Furman, director of the Hamilton Project at the Brookings Institution,
was a special assistant to the president for economic policy from 1999 to 2000.
Nobody Knows
(3) James Grant
Economists cannot reliably forecast recessions. Nor can they detect for certain
when a recession is in progress. Only after the fact do the official cyclical
timekeepers identify the beginning and ending dates of a slump.
Though deficient in the powers of foresight and observation, economists do
believe they know how to treat an economy on the brink of recession, as this
one seems to be. They administer what non-economists know as the “hair of the
dog that bit you.”
But booms not only precede busts, they also cause them. Bargain-basement
interest rates are a potent stimulant. Borrowing more than they might at higher
rates, people stretch. Businesses stock up on labor, machinery and buildings.
Consumers buy cars and houses - houses, especially, these past five years. The
GDP takes flight.
Then unwelcome facts intrude. Easy money, it seems, was an illusion. Society
was not so rich as it seemed. The inflation rate picks up. Supposedly
credit-worthy consumers and businesses turn out to be risky. They were
credit-worthy only so long as lenders were willing to advance them more and
more funds at those ever-so-affordable low rates.
Now what to do? Why, slash interest rates to coax forth still more lending and
borrowing. It’s the customary curative, seemingly as humane as it is politic.
If recessions served no useful purpose, it might be. But recessions do. On Wall
Street, they speak of “corrections.” What corrections correct are errors in
judgment. So do recessions.
They allow the sorting out of boom-time error. They permit - indeed, force -
the repricing of inflated assets. In a downturn, previously overpriced
businesses, houses and buildings are made affordable again.
Naturally, people hate these painful, salutary interludes. Nobody likes
insecurity, bankruptcy and joblessness.
So the Fed keeps slashing interest rates. Homeowners and businesses refinance
their debts. Fewer houses are thrown on an overstocked market.
Observe, however, that the great preceding illusion is undispelled. Prices have
not come down as they should have. Neither has indebtedness. Land, labor and
capital are still structured for an imagined glittering future. Presently, a
new up-cycle does begin, but it’s slow off the mark. The world’s top economy
seems curiously sluggish. And the economists and politicians ask, “What
happened to America’s dynamic economy?” The answer: It’s wrapped in the coils
of debt.
** James Grant is the editor of Grant’s Interest Rate Observer.
You can almost hear it pop
(4) Stephen S. Roach
The U.S. economy is slipping into its second post-bubble recession in seven
years. Just as the bursting of the dot-com bubble led to a downturn in 2001 and
‘02, the popping of the housing and credit bubbles is doing the same right now.
This recession will be deeper than the shallow contraction earlier in this
decade. The dot-com-led downturn was set off by a collapse in business capital
spending, which at its peak in 2000 accounted for only 13 percent of the
country’s gross domestic product. The current recession is all about the coming
capitulation of the American consumer - whose spending now accounts for a
record 72 percent of GDP.
Consumers have no choice other than to retrench. Home prices are likely to fall
for the nation as a whole in 2008, the first such occurrence since 1933. And
access to home equity credit lines and mortgage refinancing - the means by
which consumers have borrowed against their homes - is likely to be impaired by
the aftershocks of the subprime crisis.
Consumers will have to resort to spending and saving the old-fashioned way,
relying on income rather than assets.
For the rest of the world, this will come as a rude awakening. America’s
recession is likely to shift from home-building activity, its least global
sector, to consumer demand, its most global.
There is hope that young consumers from rapidly growing developing economies
can fill the void left by weakness in American consumers. Don’t count on it.
American consumers spent close to $9.5 trillion over the last year. Chinese
consumers spent around $1 trillion and Indians spent $650 billion. It is almost
mathematically impossible for China and India to offset a pullback in American
consumption.
America’s central bank has mismanaged the biggest risk of our times. Ever since
the equity bubble began forming in the late 1990s, the Federal Reserve has been
ignoring, if not condoning, excesses in asset markets. That negligence has
allowed the U.S. to lurch from bubble to bubble.
Fixated on the narrow “core inflation” rate, which excludes the necessities of
food and energy, the Fed has ignored new and powerful linkages that have
developed between economic activity and increasingly risky financial markets.
Over time, America’s bubbles have gotten bigger, as have the segments of the
real economy they have infected. The Fed needs to rethink its reckless,
bubble-prone policy. Once the current crisis subsides, the economy will require
the tight money of higher interest rates - the only hope America has for
breaking the lethal chain of endless asset bubbles.
** Stephen S. Roach is chairman of Morgan Stanley Asia.
Bet the house on it
(5) Laura Tyson
The U.S. economy faces a vicious downward spiral of foreclosures, declining
property values and mounting losses on mortgage-backed securities and related
financial assets. The resetting of interest rates on more than 2 million
subprime loans will prompt a large number of foreclosures, perhaps a million a
year in both 2008 and 2009. These huge waves of foreclosures will depress the
price of residential real estate still further.
Plummeting real estate values and escalating foreclosures will cause further
losses on mortgage-related securities and will further burden American
consumers already dealing with higher energy prices and substantial debt.
Given the dampening effects of these developments on both consumption and
investment spending, it is increasingly likely that the economy will slip into
recession next year. The Federal Reserve should continue to cut interest rates
and to experiment with new ways to pump liquidity into the financial system.
The Bush administration’s plan for a voluntary freeze by lenders on
interest-rate resets for a small fraction of subprime loans has been judged
inadequate by the financial markets. Bolder measures - a temporary moratorium
on foreclosures on subprime owner-occupied homes, a freeze on interest rate
resets for subprime mortgages, and federal funds to help at-risk borrowers to
stay in their homes and at-risk communities to reduce foreclosures - are
required to contain the potential damage to the overall economy from the crisis
in the housing and mortgage markets.
** Laura Tyson, a professor of business and public policy at the University of
California, Berkeley, was the chairwoman of the Council of Economic Advisers
from 1993 to 1995.
Early signs of U.S. stagflation
(6) Greenspan
http://news.yahoo.com/s/nm/20071216/bs_nm/usa_economy_greenspan_dc;_ylt=Ar.3j072iXEU13YK7.w5SeiyBhIF
WASHINGTON (Reuters) - The U.S. economy is showing early signs of stagflation
as growth threatens to stall while food and energy prices soar, former U.S.
Federal Reserve Chairman Alan Greenspan said on Sunday.
In an interview on ABC’s “This Week with George Stephanopoulos,” Greenspan said
low inflation was a major contributor to economic growth and prices must be
held in check.
“We are beginning to get not stagflation, but the early symptoms of it,”
Greenspan said.
“Fundamentally, inflation must be suppressed,” he added. “It’s critically
important that the Federal Reserve is allowed politically to do what it has to
do to suppress the inflation rates that I see emerging, not immediately, but
clearly over the intermediate and longer-term period.”
The U.S. central bank has lowered its benchmark interest rate three times since
mid-September as a housing downturn, tightening credit conditions, and steep
food and energy prices threaten to push the U.S. economy into recession.
But cutting rates can have the unwanted side effect of pushing up prices, so
the Fed finds itself in a tricky position of trying to revive growth without
spurring inflation.
Last week, U.S. data showed that wholesale inflation rose at the highest rate
in 34 years, while consumer prices rose the most in more than two years.
Greenspan repeated his assessment that the probability of a U.S. recession had
moved up toward 50 percent but noted that corporate America’s debt levels were
in good shape, which should help cushion the blow from tightening credit terms.
“The real story is, with the extraordinary credit problems we’re confronting,
why the probabilities (of recession) are not 60 percent or 70 percent,” he said.
“Because of the decline in long-term interest rates for a protracted period of
time, American business was able to fund a significant part of its short-term
liabilities and take out low-cost, long-term debt, so the credit needs have not
been all that large,” he said.
Greenspan has drawn some criticism for keeping the trendsetting federal funds
rate at a low 1 percent from June 2003 through June 2004, which some argue
contributed to a housing bubble that is now bursting spectacularly.
Greenspan said real estate prices will stabilize only when the overhang of
unsold new-construction homes begins to ease, and estimated that financial
losses could be in the range of $200 billion to $400 billion as securities tied
to failing subprime mortgages lose value.
He warned against any sort of government bailout plan for homeowners that
interfered with the normal functioning of markets for home prices or interest
rates, saying it would “drag this process out indefinitely.” Offering cash to
stricken homeowners instead would cause less long-term damage, he said.
“It’s only when the markets are perceived to have exhausted themselves on the
downside that they turn,” he said. “Trying to prevent them from going down just
merely prolongs the agony.”
(Reporting by Emily Kaiser; editing by Steve Orlofsky)
____________________________________________________________________________________
Looking for last minute shopping deals?
Find them fast with Yahoo! Search.
http://tools.search.yahoo.com/newsearch/category.php?category=shopping
[Non-text portions of this message have been removed]
