recession?

[Jim Devine <jdevine03@xxxxxxxxx>]

December 1, 2006
Op-Ed Columnist
Economic Storm Signals
By PAUL KRUGMAN

"It's tough to make predictions," Yogi Berra is supposed to have said,
"especially about the future." Actually, his remark makes perfect
sense to economists, who sometimes have trouble making predictions
about the present. And this is one of those times.

We're now two-thirds of the way through the fourth quarter of 2006, so
you might think we'd already know how the quarter is going. Yet,
economists' assessments of the current state of the U.S. economy,
never mind the future, are all over the place.

And here's the bad news: this kind of confusion about what's going on
is what typically happens when the economy is at a turning point, when
an economic expansion is about to turn into a recession (or vice
versa). At turning points, the various indicators that usually tell us
which way the economic wind is blowing often point in different
directions, so that both optimists and pessimists can find data to
support their position.

The last time things were this confused was early in 2001, when most
economists failed to realize that the United States was sliding into
recession. If that sounds ominous, it should: the bond market, which
has a pretty good record of forecasting recessions, is pointing toward
a serious economic slowdown next year.

Before I explain what the bond market is telling us, let's talk about
why the economy may be at a turning point.

Between mid-2003 and mid-2006, economic growth in the United States
was fueled mainly by a huge housing boom, which created jobs directly
and made it easy for consumers to spend freely by borrowing against
their rising home equity.

That housing boom has now gone bust. But the optimists and pessimists
disagree both about how bad the bust will get and about how much
damage the housing slump will do to the economy as a whole.

The optimists include Alan Greenspan, whom some accuse of letting the
housing bubble get out of hand in the first place. On Tuesday, he told
investors at a conference that the worst of the housing slump is over,
saying that "it looks as though sales figures have stabilized."

But the very next day the government released grim data on new home
sales for October, and revised its estimates for earlier months
downward. Most, though not all, of the other economic numbers that
came out this week were also substantially weaker than expected.

Pessimists feel vindicated by the downbeat data. Nouriel Roubini of
Roubini Global Economics, who has been forecasting a housing-led
recession for some time, now believes that the economy has already
stalled: he predicts zero growth for the current quarter. Economists
at Deutsche Bank say the same thing.

But that's still a minority position; most forecasters are still
telling us not to worry. So whom should you listen to? And how can you
avoid believing what you want to believe?

Maybe the best answer is to look at what the financial markets say.
Not the stock market, which is a notoriously bad indicator of the
economy's direction, but the bond market. (Paul Samuelson, the Nobel
Prize-winning M.I.T. economist, famously quipped that the stock market
had predicted nine of the last five recessions).

Since last summer, when the housing bust became unmistakable, interest
rates on long-term bonds have fallen sharply. They're now yielding
much less than short-term bonds. The fact that investors are willing
to buy those long-term bonds anyway tells us that these investors
expect interest rates to fall. And that will happen only if the
economy weakens, forcing the Federal Reserve to cut rates. So bond
buyers are, in effect, betting on a future economic slowdown.

How serious a slump is the bond market predicting? Pretty serious.
Right now, statistical models based on the historical correlation
between interest rates and recessions give roughly even odds that
we're about to experience a formal recession. And since even a
slowdown that doesn't formally qualify as a recession can lead to a
sharp rise in unemployment, the odds are very good — maybe 2 to 1 —
that 2007 will be a very tough year.

Luckily, we've got good leadership for the coming economic storm: the
White House is occupied by a man who's ideologically flexible, listens
to a wide variety of views, and understands that policy has to be
based on careful analysis, not gut instincts. Oh, wait.


--
Jim Devine / "Because things are the way they are, things will not
stay the way they are." -- Bertolt Brecht