The odds that the US will slide into recession have risen since last month from 50 per cent to 70 percent by my estimates. The US Federal Reserve took its foot off the brake on the economy this week when it took a pause in tightening monetary policy for the first time after 17 successive interest rate rises in spite of rising inflation. But it is too late. The Fed might have been hoping for a soft landing for the economy but instead it faces recession. The implications will be felt globally. The rest of the world will not decouple from the US economic train, as some analysts predict. When the US sneezes, the rest of the world still gets the cold.
The US recession will be triggered by three unstoppable forces: the housing slowdown; high oil prices; and higher interest rates. The US consumer, already burdened with high debt and falling real wages, will be hard hit by these shocks.
The effects of the housing slump will be more severe than those following the technology bubble implosion in 2001. The negative wealth effect on consumption of falling housing prices -- and the related sharp fall in home equity withdrawal -- are also larger than the wealth effects of the collapse of tech stocks in 2000. Property, unlike the tech stocks, is a significant part of household wealth. Finally, about 30 percent of US employment in the latest recovery has been related to housing.
Fed Rate Pause Too Late to Stop a US Recession
Aug 10 2006, 11:33
There is lots of chatter about an upcoming U.S. recession. The case is most cogently put in an OpEd by a NYU economics professor in yesterday's Financial Times: