NY Times-1/2/2008-The Land of Many Ifs - Recession
In the Land of Many Ifs
http://www.nytimes.com/2008/01/02/business/02econ.html?ref=business
By PETER S. GOODMAN and VIKAS BAJAJ
Published: January 2, 2008
NY TIMES
For months, the American economy has been assailed by a wave of troubling news, from plunging housing prices to the soaring cost of oil, provoking gloomy talk of a possible recession. Yet so far the economy has found a way to shrug it all off and keep growing.
How much longer can the expansion carry on? As a new year unfolds, analysts expect a verdict soon: Either the negatives finally metastasize and drag the economy down, or a fresh source of growth emerges, helping to sustain consumer spending despite the ongoing worries about housing and tight credit.
“There are even odds of a recession,” said Mark Zandi, chief economist at Moody’s Economy.com. “It literally could go either way.”
The year that just ended was not for the faint of heart. As mortgage debt became synonymous with toxic waste, banks got spooked and tightfisted. Job growth slowed. Inflation fears grew. Still, consumers kept spending, and unemployment stayed flat. American companies found enough sales abroad to compensate for weakness at home.
The bursting housing bubble remains a locus of concern. An era of free-flowing credit and speculation has led to a far-flung empire of vacant, unsold homes — 2.1 million, or about 2.6 percent of the nation’s housing stock, Mr. Zandi said. Even in the worst years of recessions in the early 1980s and 1990s, the share of vacant homes did not exceed 1.9 percent.
This assemblage of unsold properties will not be whittled down to normal levels, economists suggest, until national home prices fall by at least 15 percent from their peak, reached in the summer of 2006. So far, prices have dropped a little more than 5 percent, according to the Standard & Poor’s Case-Shiller home price index.
The glut could be exacerbated if an already alarming wave of foreclosures continues to broaden, claiming even those with supposedly good credit.
Last year, the trouble in the mortgage market was largely confined to subprime loans extended to homeowners with weak credit. Nearly one-fourth of such loans were in default as of November, according to data from First American LoanPerformance and the Federal Reserve Bank of New York.
Though default rates on loans to homeowners with relatively good credit are far lower, they are rising sharply, too. In November, 6.6 percent of so-called Alt-A home loans — those deemed somewhat less risky than subprime — were either delinquent by 60 days or more, in foreclosure, or had been repossessed. That was up from 4.3 percent in August.
This is a potentially ominous sign, because subprime and Alt-A mortgages issued in 2006 together made up about 40 percent of all mortgages. Like many of the subprime loans that have landed in trouble, Alt-A loans often begin with a low introductory interest rate that later escalates.
The spike in foreclosures is happening even before many mortgages have reset to higher rates, suggesting that borrowers are falling behind because their homes are worth less. Many are having trouble refinancing as banks tighten lending standards.
All of which explains why many economists expect national housing prices to fall by 5 to 10 percent more in 2008, and perhaps into 2009 as well, before hitting bottom.
Such a drop could ripple out to the broader economy by depressing consumer spending, which accounts for about 70 percent of all economic activity.
“It’s almost inconceivable that there won’t be severe constraints on the U.S. consumer economy,” said Bernard Connolly, chief global strategist at Banque AIG in London.
Through the recent era of multiplying housing prices, Americans have turned increased home values into cash via sales, refinanced mortgages and home equity loans — more than $800 billion a year from 2004 to 2006, according to several analysts. The pace of this flow has slowed sharply in recent months.
Fierce debate centers on how much of that money winds up financing consumer purchases, but estimates suggest that every dollar of lost housing value is likely to constrain 5 to 10 cents of spending by consumers that otherwise would have taken place over the next year or two. That could be enough to turn an expansion into an recession.
Forecasting the demise of consumer spending, however, is notoriously risky. The willingness of Americans to spend, whatever the size of their debts, seems to transcend the rules of economics.
But conditions suggesting a slowdown have been taking shape: The labor market cooled last year, creating new jobs at roughly half the rate of 2006. Wages grew slower than inflation during the last two months. Early indications suggest Americans were relatively thrifty during the holiday season.
“You have to ask yourself: where does the consumer continue to get his or her spending power?” said Jared Bernstein, senior economist at the liberal Economic Policy Institute in Washington. “If consumption falters, it’s good night nurse for the American economy.”
This is what many economists deem the most plausible of the negative situations that could unfold in 2008: Housing prices fall, consumers tighten up, and companies eliminate jobs in response to declining business, particularly in retailing, restaurants and travel.
Companies curtail investments, cutting jobs in real estate, construction and banking. This takes more money out of the economy, generating a downward spiral of declining activity. In a word, recession.
Those focused on this prospect are concerned by the weakening job market and recent increases in those filing for unemployment claims. In a report last month, Ian Morris, United States economist for HSBC, predicted that unemployment would climb to 5.3 by the end of 2008, up from an average of 4.7 percent in 2007, with the economy generating only about 40,000 nonfarm jobs each month — about one-third the pace for most of 2007.
The prospect of such a development has spurred the Federal Reserve to cut interest rates three times since September, bringing its benchmark rate down to 4.25 percent from 5.25 percent. Cheaper credit generally lubricates the wheels of the economy by encouraging investment and spending.
The Fed has expressed reluctance to continue cutting because of concerns about inflation. But further signs of economic trouble will impel it to keep lowering borrowing costs. And if oil and other commodity prices fall enough this year to dampen fears of inflation, that would give the Fed room to cut interest rates more aggressively.
The economy is rife with surprises, and unexpected good news could step in to provide relief. American consumers, despite their general gloom about the economy, continue to express satisfaction with their personal finances. That could carry the day, as they tap credit cards to finance meals out and trips to the mall, even as housing wealth dries up.
Added support for the economy is likely to come from abroad, sustaining rising exports, which have been propelled by healthy growth everywhere from China and India to Europe and the Middle East. The weak dollar helps make American products more competitive in foreign markets.
A combination of any of these factors might be enough to generate jobs and keep the economy going, regardless of real estate troubles.
Moreover, some economists assert that worries about the housing market are overblown in terms of the effect on the broader economy. While bad news seems certain to continue for real estate agents, construction companies, home improvement stores and anyone else with fortunes tied to demand for garages and ceramic tiles, the economy can continue to grow even with house prices in the doldrums, they say.
In this view, the crucial factor is the availability of credit. The mortgage crisis has made markets skittish about the extent of losses still hiding in the weeds. Lenders have been casting a wary eye at potential borrowers, diminishing the flow of credit to support everything from car purchases to the development of office towers.
If the Fed’s lowered interest rates do the trick, making banks feel more secure, an upward spiral could commence, as fresh lending spurs business and keeps the economy growing. But if jitters persist and banks remain tight, that could snuff out business, cut jobs and send the economy into a tailspin.
“If the credit card is a little harder to come by, that means there’s a little less shopping going on,” said Neal Soss, an economist at Credit Suisse Securities in New York. “If banks go into hibernation and there’s no cash for anybody, then it’s very hard to get the economy to grow with any vigor.”
If you read the ARTICLE very CLOSELY…
It says BANKS ARE RUNNING OUT OF CASH… Will be RELUCTANT to LEND ANYONE ANY MONEY!
Things ARE REALLY BAD OUT THERE despite the 5 MEDIA CONTROLLED OUTLETS “hollywood celebrity” only reporting… Even “60 Minutes” has 1 “hollywood actor” story a week!
You would think that “TheCigMan” has access to the N.Y. Times computer system or they read his “posts” 
TheCigMan
