Monday, July 03, 2006

Soft or Hard?

From the Atlanta Journal-Constitution:

Soft landing or hard?

Maybe the economy is coming in for a soft landing. Or maybe you'd better fasten your seat belt and hold on tight.

Most economists seem to agree: The economy, which turned in especially zippy growth during the first quarter of this year, is slowing to "below trend" expansion. And there is general accord on what will follow: leveling off and a return to cruising speed.

A few say the landing will turn to recession.

The sweeping support of the best-case scenario makes Dean Baker scoff. "I went back and looked at the 'Blue Chip' forecast in September of 2000. Of 50 economists, six months from recession and not one of the 50 saw it. Not one predicted the recession."

Barring an unexpected shock, whether we do slip into recession depends on two factors: whether the Federal Reserve keeps raising interest rates until growth stalls and whether the four-year housing boom is petering out.

Baker, co-director of the Center for Policy and Economic Research, puts the chances of recession at about 80 percent.

No one can be 100 percent certain whether we get the soft landing or something more painful. For every sign pointing toward recession, at least another one offers reassurance. But clearly the economy has lately carried some extra burdens: mainly, energy prices and higher interest rates, thanks to the Fed's campaign of rate increases. Yet, the economy has continued to expand.
the business sector," Hyland said. "That is what's going to save the economy from a significant slowdown."

Baker is skeptical: That might cover a mild housing decline, but not something more dramatic.

If housing falls to its levels during the mid-1990s, a boost to business spending will not be enough to compensate. To keep up, the pace of investment would have to double, Baker argued.

Moreover, the economy's shock absorbers are somewhat tattered. Americans' debts are near record levels, savings have been negative for the first time since the Depression and the government is already deep into deficit financing.

The biggest threat to a soft landing may not be one huge danger so as much as the weight from several burdens together.

"If we had just high energy prices, if we just had high interest rates — I'd be more confident," said Roger Tutterow, dean of Stetson Business School at Mercer University. "It is the combination of the two that will really tax the consumers in the second half of this year."


Blogger Richard said...

the zippy growth from 1st quarter '06 was just a spillover from the ugly growth in 4th quarter '05. put the two together and it was slightly above 3.5%, hardly zippy. still my feeling is you won't see any significant slowdown leading to a correction until the credit expansion slows down. note you can hike rates and still be creating money hand over fist. also the world market doesn't move to the drum of US short term rates.

i for one have changed my tune a bit. even with 17 rate hikes credit is still cheap and plentiful + there are more inventive ways to structure risk to keep the party going. i expect some type of consumer led recession but not until the 2nd half of 2007. growth for the next 4 quarters will average 2.5% then the lemmings are going to fall off the cliff with sub 2% growth and possibly a contraction in 4th qtr '07. at least that's what the tea leaves are telling me :)

7/03/2006 08:13:00 AM  
Blogger grim said...

My eyes have been slowly shifting from the Fed to other global central banks, mainly the BOJ.

Tankan was solid, we may see Japan lift rates at the next policy meeting.


7/03/2006 08:26:00 AM  
Blogger Metroplexual said...

Looks like the death from a thousand cuts scenario being painted here.

7/03/2006 10:51:00 AM  
Blogger chicagofinance said...

7/03/2006 09:20:00 PM  
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