Thursday, August 2, 2007

Another Point of View About the Economy Going Forward

According to the economists interviewed for this article at the economy will slow but will avoid a recession. In light of the post earlier on the mood of Americans about the future of the economy the people being interviewed make some good points. However, these points are not enough to sway me. There is still downside in the real estate market, the credit market, and at this point the stock market can't decide which way to go. All of these add up to more bad news this fall, which will dampen consumer spending more.

The outlook for the housing market looks bleaker than ever. Foreclosures are skyrocketing. Home prices continue to fall. And forecasts for a recovery keep getting pushed back.

Meanwhile the collapse of the subprime lending market has spread to the financial markets, sparking fears that tighter credit will have a broader impact on consumers and the economy.

In the financial markets, credit, including corporate bonds, has become harder to get, but Mark Zandi, chief economist of Moody's, is loath to call it a "credit crunch." He does admit to a "liquidity squeeze," however. The difference: In a crunch, nobody can get a loan; in a squeeze, only the riskier borrowers are cut out.

"Consumer spending growth has been stronger than income growth because the strength of housing prices enabled owners to borrow," according to Gault. "As prices decline, consumer spending will grow more slowly than income."

Zandi does not believe a consumer spending slowdown is enough to trigger a recession, but he's not counting it out. What it will do, he said, is "ensure that the economy grows at a pace below its potential. I wouldn't dismiss the possibility of a recession. I put the possibility at one in five."

Ken Goldstein, an economist for the Conference Board, doesn't believe the subprime contagion is enough to send the economy off-track.

"The idea that average consumers are quaking over the prospects of losing their homes or much of their equity is wrong," he said.

The mortgage market adds up to about $10 trillion, according to Goldstein, with about 10 percent to 15 percent of that in subprime. Of that, some 15 percent or so is imperiled, he said.

"It's big, but not the tipping point that will bring the whole housing market down," Goldstein said.
John Silvia, chief economist for Wachovia, agreed. "I don't think the impact of subprime lending will spread anywhere near enough to trigger a recession," he said. "It's a small percentage of overall lending."

Instead of a recession, "It's a correction" he said, "and it probably has a small impact on economic growth, on the order of 0.20 to 0.60 percentage points."

Consumers don't really care much about changes in housing prices or, for that matter, in the stock market, according to Goldstein.

"If you really want to screw up consumer confidence," he said, "go for the jugular - the labor market."

No comments:

Post a Comment