The coming US meltdown?

Brad DeLong has joined the small growing "doom and gloom" caucus. Writing at Salon yesterday, he thinks that the odds of economic meltdown are growing:

With interest rates and oil prices rising and consumers spending beyond their means, we may be headed for recession -- and worse.

He may be right; read it an decide for yourself. Also see:

* Nouriel Roubini: Why a Fed Pause or Even An Easing Will Not Prevent the Coming U.S. Recession

and Dismal GDP Report: U.S. Is on Its Way to a Recession by Year End

* Chris Dillow at Stumbling and Mumbling: Cyclical markets, rationality and urbanization

* Daniel Gross at Slate: The "R" Word - Are we heading into a recession?

Comments

[Arthur Eckart]

I disagree with much of the economic analysis that the U.S. economy will fall into recession soon. Most of the money supply tightening has taken place quickly, and monetary policy seems to be neutral at this point. So, there's little tightening in the pipeline and monetary policy is not restrictive. Also, currently, U.S. bond yields are below the Fed Funds Rate, and mortgage rates remain near historically low levels. Moreover, Americans have shown they're adept at finding ways to maintain autonomous consumption (the U.S. had only one mild recession in the past 15 years and two mild recessions in the past 24 years generally in a period of strong disinflationary growth). I believe, it's more likely the U.S. economy will slow to a more sustainable rate, e.g. 2 1/2% real growth, rather than fall into recession, and a "soft landing" will be achieved.

[Adrian de la Garza]

I've been reading for a while that George Soros, Bill Gross, and Warren Buffett are amongst the leading businessmen that are also betting on the R-word. This week's "Businessweek" issue has an article on it too.

Here is something I read on the web:

http://bigpicture.typepad.com/comments/2006/01/bill_gross_bond.html

Although I do agree with most of the reasons that businessmen, journalists, and academics give for a potential meltdown, I also agree with Arthur Eckart in that "Americans have shown they're adept at finding ways to maintain autonomous consumption."

In general, I think the word of warning is useful. However, some people seem truly stressed out by the possibility of a huge recession but I think this is unlikely. It is worthwhile to mention that a lot of these people you mention have been expressing their concerns for several quarters now, and up to now interest rates have still been rising and the economy has been growing stronger. Again, at this juncture, the word of caution is useful, but I don't think there's any reason to fret.

[me]

As usual, we are probably already in a recession and the denial goes on. I was just reading this morning that business investment is down not going forward because of CEO lack of confidence in the economy. Housing is cratering, so Arthur, where does the spending come from?

[Arthur Eckart]

I agree the housing boom that started in 1995 is over and that will create many problems for the economy, including a slow-down in homebuilding, which should contribute to unemployment, a reduced Wealth Effect, which is negative for consumption, rising rents, which is inflationary, etc. Also, foreclosures for marginal homeowners should increase. However, unlike the Dot.com bubble boom of the late '90s where stock prices soared way above profits (and many firms had no Es in their P/E ratios), homeowners have generally strengthened their financial positions through refinancing at lower rates, i.e. lowering their monthly payments, although increasing the length of their mortgages. When mortgage rates fall, home prices rise, to keep monthly payments constant for new homebuyers. So, lower interest rates have been a benefit for existing homeowners. The problem has been "financial innovation," which allowed marginal homeowners to buy homes (including adjustable rates and balloon payments), and many homeowners used equity in their homes to "trade-up" for more expensive homes (although that may be investment more than consumption). Nonetheless, Americans have to live somewhere, and even in a recession, there are monthly payments. Perhaps, some Americans will rent a room or two of their newer and larger homes, get a second job, start an internet business (the internet is growing five times faster than the economy), etc., to maintain autonomous consumption. Also, financial innovation created many of the problems and it may correct some of them, since banks don't want to hold lots of vacant homes.