|
By Michael E. Kanell
Atlanta Journal-Constitution Staff Writer
Saturday, July 1st, 2006
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 added stresses are just a temporary handicap, said Emily Sanders, president of Norcross-based Sanders Financial Management. "As things stand now, it's manageable. We are not projecting a recession."
Why should they? The economy has already shown surprising strength.
Three years ago, oil was below $30 a barrel and most economists predicted recession if it rose to $50 and stayed there. As prices climbed, many forecasters moved the line --- growth would choke on oil at $60 a barrel. Oil closed Friday at nearly $74 a barrel.
Could it be that the economy has adapted?
Higher prices are the most painful for low-income Americans. But perhaps average consumers have found ways to hold down gas expenses, said economist Michael Donihue of Colby College in Waterville, Maine. "I think they are taking fewer of those extra trips. They'll rent their video while they are grocery shopping."
The Fed has written an expansion's last chapter before.
Promote growth and keep prices stable --- that's the Fed's dual mission.
But when the Fed raises rates to cool inflation, it can also dampen growth. And for two years now, the Fed has been raising short-term rates, which adds to costs in borrowing on credit cards and home equity loans.
Lift them high enough and choke consumers, who account for nearly 70 percent of the economy, said former Fed economist Dorsey Farr, principal in French Wolf & Farr. "So it depends on how well the Fed manages this. There's always the risk that they will go too far."
The Fed's history is not encouraging --- it has usually gone too far. And Fed officials lately have been worrying loudly about the need to attack inflation, which signals a willingness to keep raising rates.
But Fed officials know what they are doing, said Sanders. "They are doing a delicate dance between inflation and growth."
Whether the Fed succeeds in chilling inflation without tipping the economy into a deep funk probably comes down to housing.
For five years, real estate has been critical to the economy, accounting for roughly one-third of job growth --- some estimates say more --- from brokers and bankers to construction workers.
More important, consumers have traded equity in their homes for trillions of dollars in cash.
Now, by most measures, the housing market is slowing. Pessimists say it's a bubble bursting --- a slow-motion version of the tech stock collapse that preceded the 2001 recession.
But unlike stocks, which are a national market, housing is regional. One city's housing market can boom while another's crashes.
Sales in Atlanta, for example, are expected to stay stronger than in an overheated market like, say, Las Vegas.
Moreover, home prices cannot drop as quickly as those of stocks.
We will get a soft landing because housing will set the tone, predicted Edmund Hyland, a global investment specialist for JPMorgan Private Bank's southeastern region.
And while housing has been crucial to the economy, business can take up the slack, Hyland argued.
Business investment crashed in late 2000, setting off the recession that followed. But it has gradually rebounded and has been surging at a growth rate of nearly 10 percent, according to Economy.com.
That spending is still shy of business investment's historical share of the economy, while housing and consumer spending have been well above their share. The situation will reverse, Hyland said.
"We think the economy is slowing at a nice pace and you are seeing a significant shift from the consumers to 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."
TROUBLING NUMBERS
> Savings rate: -1.7 percent in May
Savings have been negative for more than a year for the first time since early in the Depression. High energy prices and near-record debts are not helping.
> Prime rate: 8.25 percent
The jump from 4 percent two years ago puts pressure on any company or consumer that is borrowing money.
> Earnings growth: Up 3.68 percent in past year
Average earnings did not keep pace with the Consumer Price Index, which rose 4.1 percent.
> Gross Domestic Product: 2.1 percent growth predicted for second half of 2006
|
