The New York Times asked six economists whether the U.S. is in a recession. Their conclusion seems to be that they don't know whether we're in a recession but that the housing market slowdown and the related debt bomb could lead us there.
I'm not an economist but I played one in 2004. That's when I worked with the John Kerry campaign and had a chance to meet one of the economists -- Jason Furman -- whose op-ed appeared Sunday. I also appeared opposite another of the contributing economists, Kevin Hassett, in an interview on Wall $treet Week with Fortune the day after the Democratic National Convention.
I don't know what 2008 will bring. But I think it depends on two factors: whether the Bush administration decides to take any radical policy moves or just twiddles its thumbs until its term expires, and how deep and wide the global impact of the housing market slump and the related credit market freeze will be. To address the analysis behind this forecast, here are my thoughts on five key questions:
- The oil shock - nearly $100 a barrel. How does the common American feel about the situation? Those with high home heating bills and low to moderate incomes are hurting the most.
- The subprime meltdown: What's the true dimension? It could cost between $400 billion and $6 trillion, but subprime's tentacles reach into corners of the global economic system that have not yet been discovered. I expect surprises.
- Is the U.S. risking stagflation in 2008 due to crisis talk and the huge injection of available money from the Fed? Stagflation -- slow economic growth and high inflation -- is a real danger if the Fed's interest rate cuts fail to revive the credit markets.
- Is there a true risk from sovereign petrodollar funds and the central Asian banks? Trillions of dollars worth of funds from the Middle East and Asia could threaten U.S. economic sovereignty.
- 2008 outlook: Factoring in the policymakers. It could be a tough year for the economy if businesses can't get the money they need to grow. Layoffs would cut into consumer spending and ding economic growth.
It's very difficult to tell the future. But history does seem to follow a path of economic contraction and expansion. This pattern is based on periods of easy money which pump up asset prices so much that some people can't pay back their loans. These are followed by periods of tight money in which the banks write off the bad loans they made and replenish their capital.
During that tight money period, the economy contracts until the banks are ready to lend again. While securitization changes that pattern in ways that are difficult to measure, I think 2008 promises to be a period of contraction.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
12-17-2007 @ 3:09PM
dlamcpa said...
Recession starting begining of the year. Wall Street and the news media were in denial. Any federal tax reductions were offset by local and statement tax increases. Net "Zero". The housing bubble was created by hypes - just like the "Internet Bust". Lenders want to make big money with easy lending practices. Conventional loans were not profitable enough. So they create a "Sub-Prime" so the lender could charge more for their money.
12-17-2007 @ 5:37PM
thec2u said...
We don't need the government to tell us whether or not we are in a recession. Look at their record of telling the truth. We already are in a recession ... and the tactics they use are going to prolong the pain and make things worse. Back off and let the capitalistic free market take its course ... we are not a socialistic managed economy. Let the correction begin and move on.