Profile of a (maybe) recession
Some analysts think the slowdown may be confined largely to the housing market.
Optimism has grown this month that the United States may escape a recession. But don't haul out the ticker tape just yet.Skip to next paragraph
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The current economic slowdown is unusual – and difficult to read – because the housing market is playing such a central role.
Alongside high oil prices and a credit squeeze, a downturn in homebuilding and home prices has rattled consumer confidence, which fell Tuesday to a 16-year low. That prompts many economists to say a recession is still likely.
Yet housing cycles historically have been slow, taking years on both the up and down side. Moreover, the decline in housing wealth doesn't cause an equal or immediate decline in consumer spending. This may portend a kind of slow-motion slump, one that may not even end up officially as a recession.
"We are not going to have a recession this time. This time the troubles in housing will stay in housing," predicts Edward Leamer, director of the Anderson Forecast at the University of California, Los Angeles. "[But] it's harder to forecast because something new is happening this time."
It's common, he says, for housing to be one of the sectors hit early and hard by an economic downturn. And the current housing downturn is unusually deep. Home prices are down 14.1 percent in the past year, according to the Standard & Poor's Case-Shiller index, released Tuesday.
But recessions involve a sharp slowdown in economic activity well beyond housing and construction. Mr. Leamer says that the manufacturing sector generally plays the pivotal role, in terms of job losses, during recessions. After the last US recession, which occurred in 2001, US factories never went on a hiring spree, and this year's economic slowdown so far hasn't spawned manufacturing layoffs at typical recession rates.
Still, the housing downturn has not only cost lots of construction and banking jobs. Through home-price declines, it's also devouring trillions of dollars in consumer wealth – which in recent years had been a source of cash through home-equity loans and "cash-out" refinancing of mortgages.
That could make it hard for the economy to enter a strong growth phase.
"The second half [of this year] will not be a return to normal, and neither will 2009, basically because the consumer who was the driving force is going to be sitting on sidelines," Leamer predicts.
The crunch doesn't affect everyone equally. Some families are hard-hit by mortgage rate resets for example, while millions of others are renters or people who own homes without a mortgage.
But housing troubles could make it hard for consumers overall to spend a lot more, even if they don't dramatically cut spending.
Hence the uncertainty: Will this even end up as a recession?
A panel of economists is watching what happens now, and will ultimately have to make that call.
Members of the panel caution against reading too much into the fact that GDP didn't turn negative in the preliminary first-quarter numbers released at the end of April.
"Employment is falling," says Jeffrey Frankel, one of seven members of the business cycle dating committee, an arm of the private National Bureau of Economic Research.
It may be that a recession has simply been postponed, not avoided, he says.
Mr. Frankel, a Harvard University economist, notes that the housing slump is one of several forces buffeting consumers.