First off, dont listen to anyone who says that a recssion is Bush's or any other politicians fault, or if it has to do with the war or government deficits. Even more dumb is the notion that not regulating corporations more is the reson for problems. Any polices related to these things have long term implications and have very little to do with our current economic situation. If there is one group that does desrev any blame, it would be the Federal Reserve that kept interst rates way too low for way too long following the last recession, which allowed housing prices to grow way to quickly and cause a bubble. Well now its burst. If we go into a recession, it is primarily a housing market phenomenon along with the corrisponding monetary policy.
I work as an analyst in an economics department and your right that the consensus is about a 50?hance of recession. If one does occur, it will be because of the housing market slump, that was way too inflated before, as well as the corresponding subprime mess that is causing a credit crunch to occur in the financial markets. Gas prices are contributing to the problem somewhat, but are not the chief cause. The price estimate that you give of $4; however, is if we do not go into recession. If we go into a recession, then the price will fall due to lower demand. Though there are many reasons why gas is expensive right now, the main reason is because of very high global demand. Virtually every global region has been in economic boom. China alone is using about 60?ore oil then it used in 2000. That will change with a recession.
However, there are some good things in the economy right now that might prevent us from going into a recession. I personally give us a 40?hance of going into one, and if it does happen, it will happen between now and the late spring.
The good things:
1. The labor market, though weakening, is still pretty strong and we are still creating a positive amount of new jobs each month. The unemployment rate is 4.7?which is lower then as recently as 2005, and better then all of the past 25 years or so with the exception of about 1997-1999. Ultimately, if people have jobs, they will keep spending, and that should keep us going, even if economic growth slows. Most of the forward hiring surveys also show, that though employers dont expect to hire a lot of new people in coming months, they also don’t expect to lay anyone off. Unless, the labor market deteriorates in the coming months, we will not go into a recession.
2. The weaker dollar mixed with string global economic growth has caused our exports to boom. Our trade deficit has been shrinking for about a year now, and exports are growing at double digit growth rates. Growth in net exports were one of the reasons why GDP growth was so string last quarter despite falling home prices. It is estimate that for every 3 jobs lost in construction or financial services, that 1 job has been created by export oriented industries. Therefore trade is buffering us a bit. This was not the case leading up to the 2001 recession, when the Asian financial crisis was still occurring, and China and India were not in full throttle yet (Side note: This is the main reason why gas was so cheap in the late 90's). Now we have trade to help cushion us.
If a recession does occur, it will likely be a mild one like the past two. It will still hurt, but you dont have to worry about a depression or anything. The market goes through these cycles and it will correct itself.
Two things to keep an eye out for.
1. What the Fed reserve does. It is trying to alleviate the credit crunch which makes borrowing difficult. This in turn hurts business growth and home buying. If the Fed is able to fix this, then our chances of a recession ill go down. During the last recession, the Federal reserve did not react until it was too late, and it was clear we were already in a recession. This time, the Fed seems to be trying to preempt any problems.
2. What the federal government does with more or stronger housing bailouts. Any type of bailout for subprime borrowers will slow the declining price of homes, but it will make the decline last longer, as it will take longer for housing supply and demand to reach equilibrium and a market clearing price that will allow for expansion to occur again. If the government becomes more active, which it may due to political pressure, then the threat of recession in the short run will be lessened, but then we increase the chance that one could occur later next year of even into 2009.
There are also some other bills circulating around congress. One proposal is to amend bankruptcy law to allow people to protect their homes. If this is done, though it will help homeowners who cant pay their bills, it will make mortage lending more risky, as banks wont be able to guarrenty that they can take the home of a perosn defaults. This will force banks to increase interest rates in order to cover the added risk. This in turn will intensify the credit crunch and cause home prices to fall even further.
Also, there are talks about raising taxes on hege fund managers, carried interest, cahnging corporate accounting rules to add taxes, and so on. These are largely all taxes on capital accumulation and financing. Without getting into the fairness of these proposals, the economic effect will that this will make lending more expensive, as taxes will in part be carried over to the consumer. This would also intensify the credit cruch. This is not a time to be rasing taxes, especialy on financial capital, which is in short supply right now.
So pay attention to what happens to all of these things going forward.
If we do go into a recession, it will be a problem, but you shouldn’t worry too much and be all doom and gloom. It will be much like the past recessions we have had. We will get out of it then in a year or two.
Answered By: tv - 12/30/2007