Tuesday, February 12, 2008

The W-Shaped Economic Downturn

Somehow, that seems most appropriate. The White House is in denial about a recession and is predicting the economic stimulus package will work its magic.
The White House predicted on Monday that the economy would escape a recession and that unemployment would remain low this year, though it acknowledged that growth had already slowed.

“I don’t think we are in a recession right now, and we are not forecasting a recession,” said Edward P. Lazear, chairman of the White House Council of Economic Advisers.

Presenting the White House’s annual report to Congress on the economy, Mr. Lazear acknowledged that the plunge in housing and mortgage markets had yet to hit bottom and that growth would be low in the first half of 2008.

Many on Wall Street beg to differ. While Bush is predicting 2.7% economic growth this year, some see significantly less.
Among economists surveyed by the Blue Chip Economic Forecast, a closely watched monthly survey, the consensus prediction is that the economy will expand 1.7 percent.

Indeed, a growing number of analysts contend that the United States has already slipped into a recession and will get only a temporary lift from the stimulus package this summer.


Ethan Harris of Lehman Brothers predicted last week that the economy was likely to face a double-dip or “W-shaped” downturn before it begins a recovery.

Don't expect the 2nd dip to have run its cycle before the November elections. I say that not from a basis of any economic expertise, so clearly I could be wrong. But from many indicators we are only at the tip of the proverbial iceberg as the subprime mortgage crises now spreads into prime mortgages and beyond.
As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

At the end of September 2007, the Mortgage Bankers Association reported a 4% foreclosure rate in the prime mortgage segment. Without a doubt this is on the rise and will continue to rise, particularly in some of the hardest hit areas. In addition, this is negatively impacting many families with 6-figure incomes who have heftier mortgages in California, for instance, and will not qualify under the income restrictions of the economic stimulus package.
Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.

The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.

The "W" downturn may prove to be a long unpleasant ride, extending well into the next administration after our illustrious commander-in-chief is back in Crawford clearing brush.

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