U.S. Economy: The Worst is Yet to Come

May 23, 2008

Mark Weisbrot 
Charlotte Observer (NC), May 23, 2008

En español
This column was published in the following outlets:
May 23, 2008, McClatchy Tribune Information Services
May 24, 2008, Ogden Standard (UT)
May 24, 2008, Sacramento Bee (CA)
May 24, 2008, News & Observer (NC)
May 24, 2008, Belleville News-Democrat (IL)
May 24, 2008, Kennewick Tri-City Herald (WA)
May 24, 2008, Rock Hill Herald (SC)
May 24, 2008, Bellingham Herald (WA)
May 24, 2008, Bluffton Island Packet (SC)
May 24, 2008, Janesville Gazette (WI)
May 25, 2008, Kokomo Sunday Tribune (IN)
May 25, 2008, Honolulu Advertiser (HI)
May 25, 2008, Modesto Bee (CA)
May 25, 2008, Pueblo Chieftain (CO)
May 25, 2008, Watertown Daily Times (NY)
May 26, 2008, Charlotte Observer (NC)
May 27, 2008, Grand Forks Herald (ND)
May 27, 2008, Times Herald Record (NY)
May 27, 2008, Daily Press (VA)
May 27, 2008, Duluth News-Tribune (MN)
May 27, 2008, Augusta Chronicle (GA)
May 27, 2008, América Latina en Movimiento (ALAI)
May 29, 2008, AlterNet
May 29, 2008, International Business Times
June 1, 2008, Pantagraph (IL)
June 1, 2008, Lexington Herald-Leader (KY)
June 1, 2008, Fresno Bee (CA)
June 1, 2008, Wisconsin State Journal
June 4, 2008, Kansas City Star (MO)

June 5, 2008, Providence Journal (RI)
June 6, 2008, Newport Daily News (RI)
June 9, 2008, Cape Cod Times (MA)

Since the U.S. economy showed positive growth for the last quarter, some commentators in the business press are saying that we are not necessarily going to have a recession, or that if there is one it will be mild. This is a bit like the proverbial story of the man who jumped out of a window 60 floors up, and then said “so far, so good,” as he passed the 30th floor.

The United States accumulated a massive, $8 trillion housing bubble during the decade from 1996-2006. Only about 40 percent of that bubble has now deflated. House prices are still falling at a 20 percent annual rate (over the last quarter). This means that the worst is yet to come, including another wave of mortgage defaults and write-downs. Even homeowners who are not in trouble will borrow increasingly less against their homes, reducing their spending.

President Bush says we are not in a recession. One commonly-used definition of a recession is two consecutive quarters of declining output (GDP). The first quarter of 2008 came in at 0.6 percent, although it would have been negative if not for inventory accumulation. So by this definition we cannot say with certainty that the recession has started, although it could well have started this quarter. Of course, for most Americans it has felt like a recession hit some time ago, with real wages flat since the end of 2002, and household income not growing for most of the six-and-a-half year economic expansion.

The National Bureau of Economic Research will eventually decide on the official onset of the recession, but even its definition is arbitrary. All the indicators of a serious recession are swirling around us. The economy has lost jobs for four months in a row, which has never happened without a recession. Consumer confidence has dropped to a 28 year low – a level not seen since Jimmy Carter was president. Home foreclosure filings are up 65 percent over last year. And now commercial real estate prices are heading south, dropping 6.2 percent in the first quarter.

With oil prices hitting record highs, and the Fed beginning to worry more about inflation, more restrictive lending practices and other fallout from the credit crunch, the near-term economic future looks even dimmer.

Some look to exports to lead the recovery, but these are only 11 percent of GDP, and consumption is about 70 percent. Still, the fall in the dollar over the last six years is helping – making our exports more competitive and reducing the subsidy that we have been giving to imports for many years. In a sign of how economic illiteracy prevails in the United States, most people (thanks largely to what they hear and read in the media) see the dollar’s decline as bad economic news.

We are facing the prospect of millions losing their homes, their jobs, their retirement savings, their health insurance, and their livelihoods.

This serious economic situation greatly raises the stakes of the 2008 election. What will the government do to help the victims of economic mismanagement, to provide health insurance, and to restart the economy? Is it really more important to spend billions each week on the occupation of Iraq?

So far the government hasn’t done much. The stimulus package now taking effect, at about one percent of GDP and much of it likely to be saved, is quite small. The major legislation that Congress is considering for the housing crisis would mainly bail out lenders and investors while doing little for most underwater homeowners.

The voice of the people has yet to be heard on these questions in the halls of power. It had better get a lot louder, soon.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He is also president of Just Foreign Policy.

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