It’s become routine – another day, another downbeat economy story.
The February 4 Newsweek was no exception with its “Road to Recession” cover for the story “The U.S. Economy Faces the Guillotine,” written by Daniel Gross [1].
“The Great Global Market Freak-Out of 2008 has everyone asking whether the United States – already on the road to recession – is entering into a protracted period of economic trouble where jobs will be slashed, prices will continue to rise and the dollar will keep falling; and if so, whether the declining U.S. economy will pull the rest of the world down with it,” Gross wrote. “A recession is defined as a widespread contraction in economic activity lasting more than a few months, and because of the lag in financial data, recessions typically aren't officially declared until long after they start. In short, the United States could already be in one.”
What Gross left out was the other side – the possibility the economy will be fine and stave off a recession. There are prominent economists who aren’t completely convinced that the United States is “on the road to recession,” as Gross wrote.
“Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%,” wrote Brian Wesbury, an economist for First Trust Advisors, L.P., in the January 28 Wall Street Journal. [2] “This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.”
The battle cry repeated by those with the less-than-optimistic view is the housing woes, specifically the subprime crisis, which has spooked the markets.
“The current troubles were years in the making, and in retrospect, easy to see coming,” wrote Gross. “In the United States, the problems started with excesses and defaults in the subprime lending and housing markets. As the bubble burst, foreclosures mounted and housing activity ground to a halt.”
But, according to Wesbury, who also appeared on CNBC’s January 28 “The Call,” the housing market is only 4.5 percent of the U.S. gross domestic product.
“To put that into comparison, exports are 12 percent of GDP,” Wesbury said. “Yes, housing is weak, but exports are booming. They’re 14 percent from last year. That’s offsetting the pain from housing.”
And how about a bright spot in Gross’s Newsweek story? He wrote, “That doesn't mean the world is facing the Great Depression II – the world's economies are radically different than they were fourscore years ago, when our forefathers were forced to beg for dimes.”
Wesbury, however, offered an extremely optimistic projection for 2008 – a contrary notion rarely acknowledged.
“[T]he bottom line is the data don’t show the problem,” Wesbury said. “Remember the consensus forecast for third-quarter GDP [of 2007] was 2 percent. It came in at 4.9. The consensus forecast for fourth-quarter GDP was zero. It has now been raised to 1.5.”
Wesbury said he wasn’t officially forecasting it, but said he believed the U.S. economy could see “a 5-percent GDP number in the third or fourth quarter of ’08.” That’s a view that is often not heard in the recent rash of bad economic stories in the mainstream media.