Economists get a whiff of recession

Some start to warn that the erosion in the housing market could undermine economy

Recession! It's not yet a consensus of the crowd of economists that forecast the US economy, but gloom is spreading. And economists have no magic wand to wave to stop an economic downturn.

"A sharp decline in house prices and the related fall in home building … could lead to an economy-wide recession," warned Martin Feldstein, one of the official arbiters of US recessions and expansions, at a Jackson Hole, Wyo., conference of the Federal Reserve of Kansas City, Mo., on Sept. 1.

At that same conference was Ben Bernanke, Fed chairman. On Sept. 18, Mr. Bernanke is expected to lead the central bank's policymakers into a cut in interest rates that might, or might not, keep that warning from coming true. Wall Street is waiting to see if the Federal Funds rate – the interest on loans that commercial banks, in effect, make to one another – will be trimmed one-quarter percentage point to 5 percent, or cut by half a percent, or even more.

Dr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, suggested a 1 percentage point drop. But he didn't specify how fast this should occur. The Fed has in recent years usually shifted monetary policy gradually.

As to concern that such a rate decline might lead to a stronger economy and higher inflation, Feldstein reckoned such an unwelcome inflationary outcome would be "the lesser of two evils." The other evil would be a deeper economic slump.

The status of the US economy is of world concern. When Chairman Bernanke was in Berlin last week to deliver a nonnewsy talk to a German central bank conference, he met with Chancellor Angela Merkel to discuss the American mortgage market crisis. Some important German state banks, seeking a higher interest rate, bought shaky financial instruments based on sub-prime mortgages and are now in trouble.

Up to now, though, most American economists see a sluggish economy this year and next, but not a recession. Members of the National Association of Business Economists, surveyed before the bad news on jobs for August, figure that growth of the gross domestic product (the nation's output of goods and services) will be a modest 2 percent after inflation this year.

Paul Kasriel, at the Northern Trust Company in Chicago, is one of the most pessimistic forecasters. But he also has a top record for forecasting accuracy. He predicts GDP in the United States will grow only 1.8 percent this year. And he says the financial crisis "is going to get worse."

Harald Malmgren, a veteran Washington consulting economist, currently distressed by world financial troubles, speaks of a "recession or near-recession" ahead.

Standard economic measures to counter recession include federal tax cuts or increased spending. But Congress generally takes a long time to make decisions on fiscal policy. Moreover, notes David Wyss, chief economist in New York for Standard & Poor's, the nation faces the massive bill of the Iraq war, plus, in short order as the nation's population ages, rising Medicare costs and, to a lesser degree, a bigger Social Security deficit.

To some extent a recession is limited by what economists call "automatic stabilizers." Unemployment insurance payments, for instance, rise.

Moreover, legislation to prevent the alternative minimum tax from hurting more middle-income households will almost certainly be pushed through Congress.

More controversial is a decision on whether to tax the extremely high incomes of many hedge-fund managers as income rather than as capital gains.

If a slump should last a long time, Democrats could face an awkward decision as to whether or not to let some of President Bush's tax cuts (cuts that favor the well-to-do) expire as presently scheduled in 2009, 2010, and 2011. For instance, the estate tax is presently scheduled to be fully repealed in 2010 and return to its original 2000 levels in 2011.

You've read  of  free articles. Subscribe to continue.
QR Code to Economists get a whiff of recession
Read this article in
QR Code to Subscription page
Start your subscription today