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Monday, August 07, 2006

Paul Krugman: Intimations of Recession

Paul Krugman joins the chorus of voices worried about a coming slowdown:

Intimations of Recession, by Paul Krugman, Commentary, A Recession?, NY Times: These are the dog days of summer, but there’s a chill in the air. Suddenly — really just in the last few weeks — people have starting talking seriously about a possible recession. And it’s not just economists who seem worried. Goldman Sachs recently reported that the confidence of chief executives ... has plunged... On the face of it, this loss of faith seems strange. Recent growth and jobs numbers have been disappointing, but not disastrous.

But economic numbers ... always have to be interpreted as part of a story. And the latest numbers, while not that bad taken out of context, seem inconsistent with the stories optimists were telling about the U.S. economy.

The key point is that the forces that caused a recession five years ago never went away. Business spending hasn’t really recovered from the slump it went into after the technology bubble burst... Also, the trade deficit has doubled since 2000, diverting a lot of demand away from goods produced in the United States.

Nonetheless, the economy grew fairly fast over the last three years, mainly thanks to a gigantic housing boom. This boom led directly to unprecedented spending on home construction. It also allowed consumers to convert rising home values into cash ... so that ... spending could run far ahead of ... incomes...

Even optimists generally concede that the housing boom must eventually end... But the conventional wisdom was that housing would have a “soft landing”... You might say that the theory was that business investment and exports would stand up as housing stood down.

The latest numbers suggest, however, that this theory isn’t working much better on the economic front than it is in Baghdad. ... Now, for the first time, problems in the housing market are starting to seriously reduce economic growth: the latest ... data show real residential investment falling at an accelerating pace..., falling employment in home construction, and [falling] retail employment ... suggesting that consumer spending is running out of steam. (Gas at $3 a gallon doesn’t help...) ...

Now maybe we’ll still manage that soft landing despite a rapidly rising number of unsold houses; or maybe there’s a boom in business investment and/or exports just over the horizon. But based on what we know now, there’s an economic slowdown coming.

This slowdown might not be sharp enough to be formally declared a recession. But weak growth feels like a recession to most people; remember the long “jobless recovery” that followed the official end of the 2001 recession?

And what will policy makers do about a slump, if it happens? A snarky but accurate description of monetary policy over the past five years is that the Federal Reserve successfully replaced the technology bubble with a housing bubble. But where will the Fed find another bubble?

And with the budget still deep in deficit and the costs of the Iraq war still spiraling upward, it’s hard to see Congress agreeing on any significant fiscal stimulus package — especially because history suggests that the Bush administration and Congressional leaders will turn any debate about how to help the economy into yet another attempt to smuggle in tax cuts for the wealthy.

One last thing: the real wages of most workers fell during the “Bush boom” of the last three years. If that boom, such as it was, is already over, workers have every right to ask, “Is that it?”

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Previous (8/4) column: Paul Krugman: Centrism Is for Suckers
Next (8/11) column: Paul Krugman: Nonsense and Sensibility

    Posted by on Monday, August 7, 2006 at 12:15 AM in Economics, Macroeconomics, Monetary Policy | Permalink  TrackBack (0)  Comments (4)

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