Why Economists Are Betting
A Recession Won't Happen
By
SUDEEP REDDY
December 17, 2007; Page A2
With the financial markets in turmoil and house prices sagging, there is a lot of talk that a recession is all but inevitable.
Yet there's a case that the economy might avoid a painful downturn. In the latest WSJ.com survey of economists, forecasters on average put the chance of a recession -- often defined as two straight quarterly declines in gross domestic product -- at 38%. That's the highest in more than three years, but the forecasters' best bet right now is that the U.S. will skirt a recession.
"A lot of the underlying resilience of the U.S. economy seems a bit unappreciated," says Citigroup economist Steven Wieting. "It's not clear that this is so large a burden that we can't muddle through this."
especially difficult at turning points, and the economy is sending mixed signals. But here are some reasons why the economy might avoid the ditch:
The Fed is on the case.
The Fed, which has cut its main target for short-term interest rates by a full percentage point since August, is expected to ease rates through the middle of next year to cushion the economy from housing and credit woes, and officials are experimenting with new tools in an effort to ease the credit crunch and encourage banks to keep lending to worthy borrowers.
The Fed's actions may have already helped. Recessions typically don't begin when rates are this low, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. The federal-funds rate, charged on overnight loans between banks, peaked at an inflation-adjusted 3% in the current cycle, far lower than the 4% peak before the 2001 recession and the 5.3% high before the 1990-91 downturn.
"We're putting a lot of faith in the Fed," Mr. LaVorgna says. "A proactive Fed and low rates to begin with are very powerful factors behind keeping us out of recession."
Strong global growth is propping up the U.S. economy.
Global economic growth is raising demand for U.S. goods, offsetting softer domestic consumption. Emerging markets, which buy more than half of U.S. exports, continue to grow, some at an accelerating pace, even as industrialized economies cool.
A weakening dollar -- in part due to the Fed's easing of interest rates -- will help carry the economy through its rough patch. It will help make U.S. exports more attractive to foreign consumers, and help U.S. producers that compete with foreign producers. Moreover, foreign companies may capitalize further on the falling dollar by investing more in the U.S. -- for example, by buying stock in American companies or setting up their own factories in the U.S.
The economy is still creating jobs, supporting incomes.
The job market is signaling a modest slowdown in hiring but not a sharp increase in layoffs. While jobs continue to bleed from the housing and finance sectors, growth in service jobs remains robust and most other sectors remain afloat.
Economists in the WSJ.com survey predict an average monthly gain of about 84,000 nonfarm jobs over the next year, which would keep incomes growing and keep consumers spending. Shoppers defied many forecasts in November, opening their wallets despite concerns about the economy. That suggests the credit crunch and housing declines haven't hit consumers as hard as some analysts expected. Outside of housing, consumers and businesses can borrow at low rates. Moreover, people with the worst credit problems -- the ones least likely to get additional credit -- aren't the biggest spenders.
The housing downturn's pain will continue, but has already done much of its damage to growth.
For much of this decade, residential construction has been a significant driver of economic growth. But since last year, when home building began to tumble, housing's contribution has dropped substantially. Now, the share of economic growth due to residential-sector investment is so low that it has little room to shave GDP further.
One of the biggest questions hanging over the economy remains: How far is the housing market from its bottom? Though many major markets are experiencing steep price declines, much of the country is OK. The S&P/Case-Shiller index, a popular measure of home prices that has shown steep price declines, has limited geographic coverage -- perhaps overstating the extent to which the housing sector's declines will weigh on consumers.
"The states that are having a hard time are where there's been a lot of speculation," says Mark Nielson, chief economist at MacroEcon Global Advisors, which sees economic growth at more than 3% through next year. "Their economies probably will not do as well as the rest of the country."
Government spending remains strong.
And then there is the government -- not just Washington but state and local governments. Spending by state and local governments is contributing 25% of GDP growth this year -- and that is before an election year when officials will resist making cutbacks. "State and local spending is kind of an unsung hero here," Mr. LaVorgna says. It tends to lag federal spending and should continue to perform well next year even if it slows in 2009, he says.
The odds of recession have risen, and the economy's skies are cloudy. But there is a chance the skies will be sunnier by the middle of next year.
Write to Sudeep Reddy at
sudeep.reddy@wsj.com