Fear of Recession in US economy

More top economists now forecast Recession

Job growth is faltering, consumer confidence plunging. The fallout from the worst housing slump in a quarter-century grows. Wherever you look, the signs are unmistakable that the economy is in trouble.

Because of all the bad news, more and more economists foresee the country falling into a recession, according to the latest survey by the National Association for Business Economics.

The group said in a report being released Monday that 45 percent of the economists on its forecasting panel expect a recession this year. In September, only one in four economists was pessimistic enough to put the chance of a recession at 35 percent or higher.

he drumbeat of bad news since last fall has caused many analysts to consider a recession more likely now, said Ellen Hughes-Cromwick, chief economist at Ford Motor Co. and NABE’s current president.

The survey shows that 55 percent still believe the country will be able to skate by without falling into an actual downturn, typically defined as two consecutive quarters of declines in the gross domestic output, the broadest measure of economic health. All the analysts, however, expect growth to slow considerably this year.

The forecasters believe GDP will expand by 1.8 percent this year, which would be the weakest growth in five years. That compares with an estimate of 2.5 percent growth for 2008 made in the previous survey, in November.

The new estimate is in line with a downgraded forecast from the Federal Reserve this past week.

45 percent predict downturn this year, up from one in four last September

The NABE forecast reflects the expectation the economy will grow only sluggishly or actually contract from January through June. Then it is seen starting to expand more strongly in the second half of the year. Helping accomplish that is a $168 billion federal aid plan, with its rebate checks for millions of families, and aggressive interest rate cuts from the Fed.

The panel of 47 top forecasters thinks “any recession, if it occurs, will be short and shallow,” Hughes-Cromwick said.
The biggest change in the new survey involves the outlook for interest rates.

In November, economists expected the Fed would keep a key rate, the federal funds rate, at 4.5 percent through all of 2008. That rate, the target for overnight bank loans, already is at 3 percent, after significant cuts by the Fed in January. Fed Chairman Ben Bernanke has indicated that further rate cuts will be coming if the economy fails to rebound.

So the NABE experts now predict the funds rate will end this year at 2.5 percent.

Inflation is expected to moderate greatly this year as the weak economy cools price pressures. Inflation shot up by 4.1 percent in 2007, the biggest jump in 17 years.

The Consumer Price Index is forecast to rise by 2.5 percent. That is based in part on the NABE panel’s view that demand will weaken for oil and the barrel price will drop to about $84 by December. The current trend, however, is up; crude oil jumped to all-time highs above $100 per barrel over the last week.

The weaker growth will mean higher unemployment, according to the forecasters. They predict that the jobless rate for 2008 will average 5.2 percent, compared with 4.6 percent last year.

Stagflation

Stagflation" is back in the headlines—but the term is being misused, and that's an important story. We're told by eminent newspapers and commentators that stagflation is the messy mixture of both high inflation and high unemployment. It isn't. Stagflation, at least as the concept was initially understood in the 1970s, meant something different. Yes, it signified the simultaneous occurrence of high inflation, high unemployment and slow economic growth; but its defining feature was the persistence of this poisonous combination over long periods of time. Although we're drifting in that direction, we're not there yet.

Let's see why this is a distinction with a difference. The coexistence of high (or rising) inflation with high (or rising) unemployment is not an abnormal event. But it's usually temporary, because the higher unemployment—stemming from an economic slowdown or recession—helps control inflation. Companies can't pass along price increases; they're stingier with wage increases. It's only when this restraining process is not allowed to work that inflationary psychology and practices take root, creating a self-fulfilling wage-price spiral. Higher wages push up prices, which then push up wages. Then we get stagflation: a semipermanent fusion of high joblessness and inflation.

Naturally, no leading politician is willing to acknowledge the self-evident implication: that recessions, though unwanted and hurtful to many, are not just inevitable; sometimes they're also necessary to prevent the larger and longer-lasting harm that would result from resurgent inflation. Interestingly, many economists (even those in academia and private industry who, presumably, have more freedom to speak their minds) suffer the same deficiency. They treat every potential recession as a policy failure when it is often simply part of the business cycle. They thus contribute to a political and intellectual climate that, focused on avoiding or minimizing any recession, may have the perverse result of aggravating inflation and leading to much harsher recessions later. The stagflation that began in the late 1960s and resulted from this attitude was indeed dreadful: from 1969 to 1982, inflation averaged 7.5 percent annually and unemployment 6.4 percent.

What's renewed interest in stagflation is the latest consumer price index (CPI), the government's main inflation indicator. Released last week, it makes for discouraging reading. For the year ending in January, all prices were up 4.3 percent. Excluding the temporary surges after Katrina, inflation hasn't been higher since July 1991. Even eliminating food and energy prices (about a quarter of the index), January's year-to-year increase was 2.5 percent.

All these figures exceed the Federal Reserve's informal inflation target of 1 to 2 percent a year: a range deemed so low that it's effective price stability. And these aren't the truly disturbing numbers. The more upsetting figures are those for the last three months. In this period, the full CPI rose at a 6.8 percent annual rate. Without food and energy, the increase was still 3.1 percent. Medical services were up 5.1 percent, women's and girls' apparel 7.3 percent, and water, sewer and trash collection fees 6.7 percent (again, at annual rates). Inflation is accelerating.

Price increases of individual items can have many immediate causes: poor harvests for food; OPEC for energy; uncompetitive markets for health care; corporate market power for drugs; union market power for construction costs. But persistent inflation—the general rise of most prices—has only one cause: too much money chasing too few goods. It's not a random accident or an act of nature. The Federal Reserve regulates the nation's supply of money and credit. The Fed creates inflation and can control it.