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Nearly everyone seems to believe the U.S is now in – or immediately destined to be in – an economic recession. According to the online betting site intrade.com, for example, 7-out-of-10 participants with money on the line are betting a downturn will start this year.
The choir of recession predictors includes too many respectable economists to name. Lately, the debate has shifted beyond questions of “if?” to “how bad?” The January 21 edition of the Wall Street Journal, for example, featured an article titled “A U.S. Recession Might Be Deeper Than Past Two.”
But precisely because a recession is so widely expected, it is also unlikely. You see, forecasters have a poor record forecasting recessions, in part, because such events are theoretically aberrant. The models we build tend toward equilibrium, not disarray. For example, if demand declines then prices and interest rates should too. But lower prices and interest rates, in turn, tend to buoy demand.
So, in a flexible, dynamic economy, where information is readily available and adjustments occur quickly, recessions are hard to predict. In fact, recent recessions can largely be attributed to unforeseen events – like the terrorist attacks of 9/11, or the Iraqi invasion of Kuwait in 1990.
The “recession” of 2008, however, is hardly a stealthy one. On the contrary, policy makers are well out in front of this and are taking precautions accordingly. With its 75 basis point cut in the federal funds rate on January 22, monetary policy is already now in stimulative territory. Previously, such low interest rates didn’t occur until well after a recession began. And if future markets are even half-right, more rate cuts are coming.
Additionally, by the time you’re reading this, a substantial fiscal stimulus package of tax “refunds” and investment credits will likely be law. Given the 2-3 months it takes to process refund checks to individuals, the bounty should hit mailboxes this spring. Research on the payouts of 2001 and 2003 suggest that two-thirds of the money was spent over a six-month period, but this round should be even more impactful since its supposedly targeting low/moderate income households that spend more of their income. Additional credits for business investment should combine to provide a boost of roughly 1 percent of GDP by the second half of this year.
Finally, it’s important not to lose sight of what is arguably the principal contributor to our economic woe – the housing market collapse. Now in its third year, the decline in home sales seems close to a bottom and construction, activity isn’t likely far behind. To be sure, the secondary effects (e.g. price declines and wealth losses) will linger for longer, but these are called “secondary effects” precisely because their relevance is secondary.
Hence, the economic outlook for 2008 should resemble that of 2003 – when policy makers last acted to address our economic woes. Then, stimulative fiscal and monetary policies were enacted to counter the angst surrounding an impending War in Iraq. And when the worst fears of that time went unrealized, economic uncertainty abated just as the stimuli were kicking in – providing for a solid second half for the year. (01/24/08)
NATIONAL CITY CHIEF ECONOMIST RICHARD J. DEKASER
Ranked by USA Today as the nation’s No. 1 Economic Forecaster.
Visit his websites at www.nationalcity.com and
www.nationalcity.com/housevaluation for more publications.
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