How deep a recession?
The housing-bubble collapse makes recovery hard to predict.
(Page 2 of 2)
A new stimulus would have a different goal – to offset plunging consumer demand.Skip to next paragraph
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Signs of economic stress have appeared to reach a crescendo this week:
•New weekly claims for unemployment benefits hit a 16-year high.
•Companies announced significant new layoffs, including 52,000 jobs at Citigroup and 6,000 at Sun Microsystems. It's not just the traditionally cyclical manufacturing and construction jobs that are at risk, but white-collar jobs.
•With credit-strapped consumers pulling back, commercial real estate has joined housing on the list of trouble spots. Some insurance companies have seen their stock prices plunge because they hold bonds backed by commercial mortgages.
Moreover, the global scope of the downturn makes its trajectory hard to gauge. "Everything changed in mid-September. The credit crisis became credit crunch on a global basis," says Ed Yardeni, a longtime Wall Street economist whose firm is based in Great Neck, N.Y. "Now we're looking at a global recession."
He says it's possible that the economy won't end up with unemployment rising to the 9 percent level of 1974 or the nearly 11 percent rate seen in 1982.
But he does see parallels to three decades ago. In the mid-1970s, he says, an oil-price shock and tight credit also hammered consumers, as they have today.
But it's a measure of different times that in the mid-1970s the Federal Reserve was battling inflation, while this week a decline in consumer prices has highlighted the risk of deflation – which can also damage consumer confidence – as consumers and businesses try to scale down on debt.
"The frightening aspect is, if the group responsible for 70 percent of GDP decides to retrench, it is very difficult to offset that" with policy measures, says Vincent Reinhart, an economist at the conservative Heritage Foundation in Washington.
"We could see a protracted increase in unemployment rate," he says. "And remember, the last two recoveries we had were jobless recoveries."
Against the negative swirl, economists also see positive forces at work. Home prices in many cities have fallen nearer to their long-term trend in relation to local incomes. Mr. Yardeni notes that oil prices have been falling, easing one key strain on consumer budgets.
And policymakers will probably continue to craft responses designed to prevent any 1930s-style collapse. "They're not going to want to preside over a depression for the next couple of years," Yardeni says. "We need something that will revive confidence and trust. We all want to get on with our lives and enjoy a period of prosperity again."