Friday, October 26, 2007

There Will Not Be a Recession, But Here Are All Reasons Why There Could Be a Recession

This all sounds like double speak from Michael Boskin, but it is actually quite informative. But you do have to read between the lines. Text in bold is my emphasis. From Market Watch:

Despite severe problems in the housing market, a credit crunch and record-high oil prices, the U.S. economy will skirt a recession in the coming few quarters and get back on a solid growth path after that, economist Michael Boskin told real estate industry executives Thursday at the Urban Land Institute fall conference.

Boskin, a senior fellow at the Hoover Institution at Stanford University and former chairman of the Council of Economic Advisers under the first President Bush, told 6,700 members of ULI that the U.S. economy is clearly slowing, although GDP growth will stay positive.

However, there is a risk that something worse could transpire, especially if housing prices spiral downward, Boskin said.

"There are a lot of headwinds for the economy housing, autos, oil. And we don't have a lot of shock absorbers left," he said. "So anybody who doesn't have a Plan B (for their business) should get one." I assuming that everyone has a "Plan B".

Boskin said job growth, while not booming, remains on a steady pace and that unemployment near 4.5% means the U.S. economy remains near "something that resembles full employment." And he said that households have added significantly to their net worth in the last few years, not through payroll savings but through asset growth in housing and the stock market. The housing net worth is probably illiquid at this time.

"Savings look OK as long as asset values hold up. And unless there is a large download of asset values, household balance sheets are in good shape," he said.

The key trouble spot is home prices, which have been falling in many markets and are likely to show an overall national decline this year and next of 2% or so.

"But if home prices stabilize, most people will still have more home value than they did three or four years ago. Homeowners don't 'mark to market' immediately," he said, and so are unlikely to look upon small declines in home values as a problem for their overall financial position.

Boskin's longer-term outlook for the U.S. economy is "cautiously optimistic," he said, with the U.S. in as good a long-term position as economies in Japan, the rest of the Asian region and Latin America, and decidedly in better shape than Europe, which he said benefited from a "golden era" in global growth in the last three years but which has a pessimistic long-term outlook. What is the issue with Europe?

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