The US Federal Reserve saw it coming, but couldn't move swiftly enough.
Still, Fed chairman Ben Bernanke's interest rate cuts helped keep the recession as short and mild as those of 1990-91 and 2001.
There are three rules to keep in mind when reading a recession prediction.
• Rule No. 1: Forecasters rarely call the turn in the economy accurately. Even the wisest business cycle veterans have a hard time.
"There are forecasts of thunderstorms and everyone is saying, ‘Well, the thunder has occurred and the lightning has occurred and it's raining.' But nobody has stuck his hand out the window," then Fed chair man Alan Greenspan told Fed colleagues on 2 October 1990, transcripts reveal.
"And at the moment," he said, "it isn't raining. ...the economy has not yet slipped into a recession."
Much later, arbiters at the private National Bureau of Economic Research determined a recession had begun that July.
• Rule No. 2: Once forecasters start shaving their growth forecasts, they tend to keep shaving them. At the end of August, economists surveyed by Macroeconomic Advisers, a St Louis forecaster, predict ed that the US would grow at a 2.7% annual rate in the fourth quarter; last week, they were betting on a 1.6% growth. • Rule No. 3: There are always good reasons to argue, "This time it'll be different." But "this time" is usually different in specifics, not in the overall outcome.
The housing story is painfully clear.
A June WSJ.com survey found that, by a 3:1 ratio, economists thought the worst of the housing bust was behind us.
They were wrong. Housing kept sinking. Housing starts in September were 26% below year-earlier levels.
That's a direct hit to economic growth.
Falling housing prices are a second hit. The price of the median existing home sold in September was down 4.2% from a year earlier. That is reducing household wealth, shaking confidence and increasing foreclosures.
That's significant because today's recessions are trig- gered more by collapsing asset prices-the bursting tech- stock bubble in 2001, for in- stance-than by the old cycle of retailers and factories react- ing to rising inventories of un- sold goods by curtailing orders and production.
"Only twice have we had this kind of housing collapse with- out a recession, in 1951 and 1967, and both times the de- partment of defence came to the rescue, because of the Korean War and the Vietnam War," Edward Leamer of the University of California, Los Angeles (UCLA), told the Fed's Jackson Hole, Wyoming, con ference in August.
Leamer and his UCLA fore casting team say this time will be different. They predict "a near-recession experience", but expect factories, aided by export orders, to avoid reces sion-inducing layoffs. (See Rule No. 2.) The energy story is less clear. Oil and gasoline prices are up and look likely to keep rising. That has hurt, but not crippled, consumer spending on other things.
But oil at nearly $90 (Rs3,555) a barrel-$30 higher than at the start of the year-doesn't seem to have had much impact on global economic growth yet.
There's good reason for that: oil prices are up partly because China's growth spurt increases its appetite for crude oil.
You can't have a recession because you have too much demand. And inflation-fearing central banks haven't panicked and raised interest rates in response to higher crude oil prices, as they once did.
But that was yesterday's story. If oil prices keep climbing because producers can't or won't increase supply or because of recurrent tensions in West Asia, the effects are unlikely to be as benign. The next $10 increase in oil could hurt consumers more than the last $10 increase.
And then there's the prospect of a credit crunch, the consequence of lenders and investors being burnt by mortgages and other loans that turned out to be much riskier than anticipated.
As the late economist Rudiger Dornbusch used to say: "The crisis takes a much longer time coming than you think and then it happens much faster than you would have thought." Rudi was right.
Commercial banks, investment banks and the market itself are tightening lending terms. That may, as central bankers argue, be a welcome reaction to excessively generous lending in years past.
But coming on top of housing and energy, the understandable desire of lenders to be a bit more tight-fisted is likely to turn what might have been painfully slow growth into recession.
Now, recall Rule No. 1.
What could prove me wrong?
Bernanke talks hopefully about a "two-speed economy" in which housing remains weak and the rest of the economy remains strong. After all, the best guesses are that the US grew at significantly better than a 3% annual rate in the quarter ended 30 September.
The continued boost to US exports from a weakening dollar and continued economic vitality in Europe and Asia could yet offset the triple whammy.
But global growth prospects, except for China, look gloomier than six months ago. And, at home, the job market could continue to be strong enough to give consumers the wherewithal to keep spending.
But that's not the story I expect to be writing in October 2008.
wsj@livemint.com
No comments:
Post a Comment