Issue of the week: The economic outlook darkens

The economic outlook darkens

Fasten your seat belts, folks. “American consumers are jittery and seem all but certain to push the U.S. economy into recession,” said Colin Barr in Fortune. With just a month until Christmas, consumer confidence fell to a two-year low in November, and for good reason. Housing prices in November fell a record 4.5 percent, with no region in the country spared from sharp declines. Further, “job growth is slowing, and wage gains have been anemic.” And “a persistent rise in energy prices” is driving up the cost of home heating and forcing consumers to dig deeper at the gas pump. Put it all together, and the data point to a sharp slowdown in consumer spending, which accounts for about three-quarters of U.S. economic activity. “Right now, the question is how bad it’s going to get,” said Merrill Lynch economist David Rosenberg.

Pretty bad, judging by the signals the financial markets are sending, said Neil Irwin in The Washington Post. “They’re saying the odds of a recession are pretty damn high,” said economist Diane Swonk of Mesirow Financial. The major stock indexes this week officially entered “correction” territory, sinking 10 percent below the record highs they touched in October. Bond

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

markets, meanwhile, saw a return to the panicky days of last summer. Although the Federal Reserve pumped additional cash into the banking system this week, the market for low-grade corporate and mortgage bonds all but dried up, as investors fled to the safety of risk-free Treasury securities. The economy may not be in a recession yet, said Mark Zandi in Economy.com, but it’s rapidly approaching “a tipping point, where sentiment unravels and feeds on itself.”

Even if economic policymakers do everything right, “the odds now favor a U.S. recession that slows growth significantly on a global basis,” said former Treasury Secretary Lawrence Summers in the Financial Times. But while it may be too late to avert a recession, Washington can take “concrete steps” to limit the damage. The administration should be prepared “to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families.” Policymakers must also be ready to use “nontraditional” measures to return the bond market to health. And the government “needs to assure that there is a continuing flow of reasonably priced loans to creditworthy home purchasers.” Failure to act would raise “the risk that the adverse impacts will be felt for the rest of this decade and beyond.”

“Don’t believe all the hype” about recession—at least not yet, said Robert Samuelson in Newsweek. Except for housing, the lending slowdown has had only “modest” effects on consumers and businesses. Consumers are still borrowing, and businesses are still investing in new plant and equipment. But if a recession does materialize, some of the biggest losers could be Republicans running for office in 2008. “People vote their pocketbooks,” and with the public still holding the Bush administration responsible for the economy, a recession would “swing the advantage” to the Democrats in the next election. Indeed, it may not matter how “frantically” the candidates campaign. “The nation’s financial markets may be quietly determining the victor.”