[GJM] Economy Looks Bad for 2007

[marguerite hampton]

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http://www.commondreams.org/views07/0105-20.htm
This column was distributed to newspapers by McClatchy-Tribune
Information Services
Published on Friday, January 5, 2007 by CommonDreams.org
Economy Looks Bad for 2007
by Mark Weisbrot
 
The big question for the U.S. economy now is whether we will make it
through 2007 without a recession. Most of the top economic
forecasters are predicting a "soft landing," which means the economy
slows but not so sharply as to cause a recession. But almost all of
these same experts failed to forecast the last recession, and they
missed the stock market bubble (the largest financial asset bubble in
history). And most of them also missed the housing bubble until it
began to burst. So it would not be prudent to rely solely on their
forecasts at this time.
The timing of any downturn is not easy to predict. But a recession is
likely, because of the enormity of the housing bubble and the impact
of its collapse. Recall that our last recession (in 2001) was caused
by the bursting of a stock market bubble of about $7 trillion. The
housing bubble is comparable in size (about $5 trillion at peak) and
the bubble wealth is much more widely distributed: most Americans
still have most of their assets in housing and little or nothing in
stocks.
 
As this housing wealth disappears, people cut spending. We have
already seen an enormous drop in the amount that people borrow on
their homes, from $600 billion last year to about $350 billion for
2006. It was this borrowing, enabled by soaring house prices that
allowed people to borrow more against the value of their homes, that
fueled the U.S. economic recovery since 2001.
 
Housing construction and sales are also a big sector of the economy,
currently about 6 percent of GDP. If that falls 30-40 percent, as it
has in previous downturns, that's a drop of about 2 percent of GDP.
 
The recession caused by the stock market bubble bursting, which
lasted only from March to November of 2001, would have been a lot
worse if not for the enormous demand created by the housing bubble.
So what will rescue the U.S. economy from the collapse of the housing
bubble?
 
It's not easy to imagine what that would be. Personal savings rates
are already negative, a phenomenon not seen since the Great
Depression. How much can consumers borrow on their credit cards? A
sustained surge of business investment is unlikely in the face of an
economy that is already slowing: GDP growth was just 2.0 percent in
the third quarter, down from 2.6 and 5.6 percent in the previous two
quarters.
 
And there are downside risks from the global economy: foreign central
banks are keeping our long-term interest rates extremely low -- below
short-term rates -- by accumulating 10-year U.S. treasury bonds. They
could lose just some of their appetite for this debt at any time and
send U.S. long-term rates upward. A decline in the dollar, which is
inevitable given that we are borrowing more than 6 percent of GDP
from other countries, poses similar risks - although it will
eventually help the U.S. economy by narrowing our trade deficit.
 
We could possibly get through the international imbalances for
another year but the housing bubble collapse is already upon us, with
November's housing starts down 25 percent over the last year, home
sales plummeting, and home prices falling. This is something that our
political leaders and policy-makers should have warned people about,
rather than encouraging the same kind of speculative excess that
dominated our economy during the late 1990s stock market bubble.
 
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Mark Weisbrot is Co-Director of the Center for Economic and Policy
Research, in Washington, DC
 
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