Intimations of recession
Posted on Wednesday, August 9, 2006
These are the dog days of summer, but there’s a chill in the air. Suddenly—really just in the last few weeks—people have starting talking seriously about a possible recession. And it’s not just economists who seem worried. Goldman Sachs recently reported that the confidence of chief executives at major corporations has plunged; a clear majority of CEO’s now say that conditions in the world economy, and the U. S. economy in particular, are worsening rather than improving. On the face of it, this loss of faith seems strange. Recent growth and jobs numbers have been disappointing, but not disastrous. But economic numbers don’t speak for themselves. They always have to be interpreted as part of a story. And the latest numbers, while not that bad taken out of context, seem inconsistent with the stories optimists were telling about the U. S. economy.
The key point is that the forces that caused a recession five years ago never went away. Business spending hasn’t really recovered from the slump it went into after the technology bubble burst: nonresidential investment as a share of GDP, though up a bit from its low point, is still far below its levels in the late 1990 s. Also, the trade deficit has doubled since 2000, diverting a lot of demand away from goods produced in the United States.
Nonetheless, the economy grew fairly fast over the last three years, mainly thanks to a gigantic housing boom. This boom led directly to unprecedented spending on home construction. It also allowed consumers to convert rising home values into cash through mortgage refinancing, so that consumer spending could run far ahead of families’ incomes. (Americans have been spending more than they earn for the past year and a half. )
Even optimists generally concede that the housing boom must eventually end, and that consumers will eventually have to start saving again. But the conventional wisdom was that housing would have a “soft landing” —that the boom would taper off gradually, and that other sources of growth would take its place.
The latest numbers suggest, however, that this theory isn’t working much better on the economic front than it is in Baghdad.
Signs of a deflating housing bubble began appearing a year ago, but for a while it was possible to argue that eliminating a bit of “froth” in the housing market wouldn’t do the overall economy much harm. Now, for the first time, problems in the housing market are starting to seriously reduce economic growth: the latest GDP data show real residential investment falling at an accelerating pace. The latest job numbers show falling employment in home construction, and retail employment has fallen over the past year, suggesting that consumer spending is running out of steam. (Gas at $ 3 a gallon doesn’t help, either. )
Meanwhile, neither business investment nor exports seem to be growing fast enough to make up for the housing slump.
Now maybe we’ll still manage that soft landing despite a rapidly rising number of unsold houses; or maybe there’s a boom in business investment and / or exports just over the horizon. But based on what we know now, there’s an economic slowdown coming.
And what will policymakers do about a slump, if it happens ?
With the budget still deep in deficit and the costs of the Iraq war still spiraling upward, it’s hard to see Congress agreeing on any significant fiscal stimulus package—especially because history suggests that the Bush administration and congressional leaders will turn any debate about how to help the economy into yet another attempt to smuggle in tax cuts for the wealthy.
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