I have been talking about the US economy for months while the Chimperator and others in his regime have stupidly tried to claim that the economy was fine and strong. Anyone believing that line no doubt still thinks Saddam had WMD's. As this New York Times story (http://www.nytimes.com/2008/01/13/business/13econ.html?hp) indicates, now that folks have finally awakened to the problem, the attempted cures may well be too late to stop the gathering economic downturn. I continue to believe that things are going to get very ugly. I hope I am proved wrong, but I do not think I will be. Here are some highlights:
With a wave of negative signs gathering force, economists, policy makers and investors are debating just how much the economy could be damaged in 2008. The answer could be a defining factor in the outcome of the fiercely contested presidential election. Not long ago, the race centered on the war in Iraq.
But now, as candidates fan out across the country, visiting places as varied as the factory towns of Michigan and streets lined with unsold condominiums in Las Vegas, voters are increasingly demanding that they focus on the best way to keep the economy from slipping off the tracks. The measures now being debated in Washington and on the campaign trail — tax rebates, added help for the unemployed and those facing sharply higher heating bills and, most immediately, a move by the Federal Reserve to further cut interest rates — could certainly moderate the severity of a downturn.
But the forces menacing the economy, like the unraveling of the real estate market and high oil prices, are too entrenched to be swiftly dispatched by government largess or cheaper credit, some economists say. “The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
In the view of many analysts, the economy is now in a downward spiral, with each piece of negative news setting off the next. Falling housing prices have eroded the ability of homeowners to borrow against their property, threatening their ability to spend freely. Concerns about tightening consumer spending have prompted businesses to slow hiring, limiting wage increases and in turn applying the brakes anew to consumer spending.
A widely watched index showed manufacturing slowing, despite a weak American dollar that has encouraged growth in exports. The construction of new homes has already fallen by some 40 percent since the peak in 2006. The sales of new homes have fallen even faster, suggesting that a large oversupply of places to live will continue to drag down prices. Home prices have dropped by about 7 percent since the peak in 2006, but some experts suggest they could fall by another 15 to 20 percent before hitting bottom.
“There is still a long way to go,” said Nouriel Roubini, an economist at the Stern School of Business at New York University and chairman of the research firm RGE Monitor. Mr. Roubini has long predicted the real estate downturn would cause a severe recession. He envisions foreclosures accelerating this year, and banks counting fresh losses. That could make them less able to lend and further slow economic activity, not just in the United States but around the world.
“We’re facing the risk of a systemic financial crisis,” Mr. Roubini said. “It’s not just subprime mortgages. The same kind of reckless lending has been occurring throughout the financial system. And it’s not only mortgages: Now it’s credit cards and auto loans, where we see problems increasing. The toxic junk is popping up everywhere.”
A recession could pack enormous political consequences. Over the last century, the economy has been in a recession four times in the early part of a presidential election year, according to the National Bureau of Economic Research. In each of those years — 1920, 1932, 1960 and 1980 — the party of the incumbent president lost the election.
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