Economists Don’t Predict Recession, Which Is Why We Are Headed For One

Posted on November 21, 2007
Filed Under Business & Entrepreneurship, Finance & Economics, Global Issues |

Most economists aren’t predicting a recession for the American economy in 2008, which is exactly why we are going to have one.

According to the Economist’s briefing on the American economy, it is very likely the US will see a recession in 2008, but even if it doesn’t it will still feel like one. This is because the downturn is going to be fueled by the consumer. Here are the problems identified in the article, which is well worth reading:

1. Home price declines will continue to accelerate. The wealth effect of falling prices will change the behavior of consumers as the housing downturn enters a second, more dangerous, phase.
2. The credit crunch will soon restrict consumer access to debt, which has fueled consumer spending, as we begin to understand its severity. The ratio of household debt to income is now 130%. Earlier in the decade it was 100%; in the early 1990’s it was 80%.
3. A spike in oil prices will exacerbate the pain in the short term as the higher prices of oil in the global market are reflected at the pump. The recent surge in oil has not been fully reflected in American petrol prices, largely because refineries had unusually fat margins earlier in the year.
4. Job growth has been trending downward. While the labor market is still strong, careful inspection shows a wide slowing. The pace of net job creation has fallen from a monthly average of 189,000 in 2006 to 118,000 in the past three months.

According to the Wall Street Journal’s survey of economists and forecasters in November, the odds of a recession in 2007 are still at less than 50%. To be precise the odds are at 27.1% for the remainder of 2007 and 33.5% in 2008. The Economist uses this information as a leading indicator of a coming recession. Here is the quote from the Economist:

“IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession’s pitiful forecasting record offers little comfort.”

I suppose a forecaster who is wrong all of the time is just as good as one who is consistently correct.

Given all of the above information, its no wonder why consumer confidence has been plummeting. The University of Michigan’s index is at is lowest level in 15 years.

GDP is largely dependent upon consumer spending, which accounts for about 70%, but the good news is that a downturn will also depend on business investment and net exports. And today, as compared to the last recession in 2001, businesses have much stronger balance sheets overall. Further, because of the weaker dollar and strong demand for imports from the emerging economies, things may not be quite as bad as they seem.

Nonetheless, according to the Economist it doesn’t matter if we formally go into a recession.  Since the slowdown will be led by the consumer, its going to feel like a recession either way.

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