Another Article About the Increased Chances of a Recession

Mark Zandi, the chief economist at Moody's Economy.com, has increased his chances of a recession in the US to 40% over the next 12 months, from CNNMoney.com. Admittedly, no one knows if or when the next recession will occur, but the point of the this post and two previous posts on this site (#1 and #2) is that many are beginning to state that the chances are getting higher for a recession within the next year. The real problem is that we are in uncharted territory with regard to the housing slump. Everyone knows that there will be job losses, wealth losses, and less spending money due to housing, but no one is sure how this will impact consumer spending.

Moody's Economy.com is forecasting an increased risk for recession in the next six to 12 months due to the subprime mess, which has shaken investor and consumer confidence, bumped up foreclosures and led to a tightening of credit standards for most loans.
Mark Zandi, Economy.com's chief economist, now sees a 40 percent chance of recession, up from the roughly 12 percent chance he was forecasting in August. Nevertheless he doesn't think the economy will actually sink into recession, by which he means broadly persistent declines in economic activity.

"The economy may be contracting now, but for it to be a recession it has to last more than a few months," Zandi said. And it has to broadly affect most sectors. For now, he thinks the greatest risk is concentrated in housing.

"I think the housing sector is going to get hammered," Zandi said. That will show up as continued declines in construction and median home prices as well as job losses in companies with ties to the housing industry.

Economy.com is forecasting that foreclosures will peak at close to 1 million in 2008, and that the existing single family median house price will bottom out at just over $200,000 by mid-2008.

That's down from $220,000 today, a level that likely won't be recovered until 2010, Zandi predicts.

But, Zandi said, "I don't think consumer spending will fall unless the job market is contracting. And I'm fundamentally optimistic we won't see job loss," Zandi said.

He does, however, expect slower growth in jobs and hiring as well as in consumer spending, which he forecasts will grow 1.5 percent over the next year, down from the 3 percent recorded in the second quarter.