Economic slowdown, yes, but no recession


Recession is on the menu. Because of the housing slump, $3 gas, indebted consumers and higher interest rates, analysts increasingly suspect production and employment may shrink in coming months, possibly dealing the country its worst economic blow since 1990.

"The U.S. economy is headed for a sharp recession by early 2007," Nouriel Roubini, chairman of Roubini Global Economics Monitor, says on his blog.

"Intimations of recession" was the headline on economist Paul Krugman's column in The New York Times two weeks ago.

"The economy is slowing, and I suspect that by the end of the year it could very well be in recession," investment strategist Gary Shilling told CRN magazine (formerly Computer Reseller News ) last month.

Here is why they are probably wrong:

Pessimists usually are. History is strewn with many more recession warnings than recessions.

The housing bubble is not the same as the tech-stock bubble. Even if homeowners overpaid, most won't dump houses on the market the way they dumped Global Crossing shares. They need them to live in.

Yes, home prices are flattening. Yes, some speculators will get burned. Yes, home equity available to back consumer spending will shrink. But if the nation could survive terrorist attacks and the evaporation of $7 trillion in 1990s stock wealth with only a mild recession in 2001, surely it can get past an orderly softening in home prices without any recession.

Consumers, though stretched, are better off than you think.

The scary charts of ballooning personal debt neglect to show that interest rates on the debt are lower than they have been in decades. Household debt service - monthly interest and principal payments - has risen much more slowly. It's at record levels, but as a percentage of income it isn't much higher than it was three years ago, according to the Federal Reserve.

Official measures of consumer savings also paint a gloomier-than-deserved picture. The "negative savings rate" you hear about doesn't count hundreds of billions of dollars in pension income, capital gains and inheritances. How anybody can draw conclusions about household saving without including them is beyond me.

The country doesn't need as much oil as it once did to create growth. In 1980, U.S. petroleum purchases came to 8 percent of gross domestic product, according to the Energy Department. Last year, it was in the 4 percent range. That means high gas prices, while a pocketbook shock, are less likely to push the economy into a downturn.

Technology efficiencies make recessions less likely.

A traditional recession trigger was the inventory glut, which occurred when factory managers overestimated demand. By the time they realized customers weren't buying, they had to lay off employees to work down excess stocks, which converted what might have been a mild slowdown into something worse.

Now everything is linked by computers. The cash register at Home Depot talks to the Black & Decker factory, meaning manufacturers can tune production with consumer needs without traumatic jolts. At the same time, service businesses make up a bigger piece of the economy than ever, which also reduces the odds of overproduction. It's hard to have an inventory glut of haircuts.

This is a big reason that the country has had only two recessions since 1982.

Banks are fine. Another recession trigger is the credit drought, when bank balance sheets deteriorate, regulators get goosey and loans are hard to get at any rate. A credit drought helped produce the recession of 1990, but there is no sign of one now.

Mortgage delinquencies and foreclosures will surely rise as housing cools off. But not enough to cause big problems.

Long-term interest rates are still low. According to, you can get a 30-year mortgage for 6.1 percent. That's only about a percentage point higher than when rates reached their lows in 2003.

The world economy is healthier than it has been in years. I'm not sure I agree with Morgan Stanley economist Richard Berner, who wrote last week that global growth could "sustainably boost U.S. net exports for the first time in two decades" and spur a comeback in business investment. But it should bolster exports somewhat and diminish odds of a downturn.

The most likely scenario is more of what we've seen recently: mediocre job creation, a housing slump and moderating growth. But no recession.

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