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Recession Odds More Than 50%
Topic Started: Jan 7 2008, 08:16 AM (112 Views)
Dandandat
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Time to put something here
Quote:
 
Feldstein Says Recession Odds More Than 50% on Jobs (Update2)

By Steve Matthews

Jan. 7 (Bloomberg) -- Harvard University economist Martin Feldstein, head of the group that dates U.S. economic cycles, said the odds of a recession have risen to more than 50 percent after a report showing unemployment jumped in December.

``We are now talking about more likely than not,'' Feldstein, president of the National Bureau of Economic Research, said in an interview in New Orleans two days ago. ``I have been saying about 50 percent. This now pushes it up a bit above that.''

The jobless rate rose to 5 percent in December, the highest in two years, from 4.7 percent in November, a government report showed last week. Payrolls rose by 18,000, the least since August 2003.

The U.S. economic expansion is cooling after a third- quarter surge as the housing slump enters its third year and consumer spending slows. Former Federal Reserve Chairman Alan Greenspan and ex-Treasury Secretary Lawrence Summers are among those raising the prospect of a recession.

The increase in unemployment will hurt consumer confidence, Feldstein said in the interview. He was in New Orleans to speak at an economics panel discussion on productivity that was part of the annual meeting of the Allied Social Science Associations.

``Consumers, with essentially no growth in jobs in December, are going to be more nervous about the future,'' said Feldstein, 68. ``They are going to be a little more reluctant to spend, and that is going to put a further drag on growth in 2008.''

Growth to Slow

The U.S. economy, the world's largest, grew at a 1 percent pace in the fourth quarter after expanding at a 4.9 percent rate the previous three months, according to the median estimate of economists surveyed by Bloomberg News last month. Growth for all of 2008 is projected at 2.3 percent.

The economy is heading for ``one of the worst recessions we've had in a while,'' investor Jim Rogers said in a Bloomberg Television interview today from Singapore. He said investors should sell the dollar as global currencies weaken.

The Federal Reserve has cut its main interest rate three times since Sept. 18, to 4.25 percent from 5.25 percent. The next meeting is on Jan. 29-30.

``They have to keep lowering rates,'' Feldstein said. A reduction of half a percentage point in the federal funds rate, which banks charge each other for overnight loans, would ``not be a bad thing at this point.''

Fiscal Stimulus

Rate cuts alone may not be enough to keep the economy growing, Feldstein said. He said Congress may have to cut taxes to stoke consumer spending and restore confidence.

``I am not sure that reduction in rates is going to have as much traction as it did in the past because so much of the problems now are problems of confidence in the financial sector and of bank capital,'' he said. ``So that is why I have been saying we need some kind of a fiscal stimulus.''

Housing starts fell 3.7 percent in November from October and were 48 percent below their January 2006 peak, according to a Commerce Department report last month.

``Housing starts have collapsed, so you have low construction, low household wealth and that is now beginning to accumulate and to shift over into reductions in the growth of employment and therefore in the growth of incomes,'' Feldstein said.

`Nowhere Near' Recession

The bureau's Business Cycle Dating Committee isn't close to meeting to decide whether a recession has started, said Robert Hall, an economist at Stanford University who leads the panel.

``The committee operates retrospectively,'' Hall said in an e-mail response to a question about the committee's plans. ``As a general matter, we don't meet until it is reasonably clear that a downturn has occurred,'' he said. ``We are nowhere near that point today.''

Economists at Lehman Brothers Holdings Inc. say more evidence is needed before they can say whether the U.S. economy is contracting.

``Recession talk seems premature,'' said Lehman Chief Global Fixed-Income Strategist Jack Malvey and Chief U.S. Economist Ethan Harris in a note. ``Confirmation still requires additional data, in particular December retail sales, out in mid-January.''

At the same time, ``odds of outright recession certainly have increased'' and a ```recession spell' at some juncture over the next two years should hardly surprise markets,'' they said.

Feldstein has headed the NBER, which like Harvard is based in Cambridge, Massachusetts, since 1984. He also served in the post from 1977 to 1982. Feldstein plans to step down from the NBER in June to conduct more research on his own, his assistant, Norma McEvoy, said in September.

To contact the reporter on this story: Steve Matthews in New Orleans at smatthews@bloomberg.net .

http://www.bloomberg.com/apps/news?pid=206...w&refer=economy

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ds9074
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I've read a couple of articles now saying the seeds of the credit crisis were sown in the very low interest rates used to prevent recession after the dot-com bubble burst.

Now in this article there are calls for lowering rates again to avoid recession.

Surely if it acted to store up problems once it not a great idea to try it all over again. The last thing people need to do is be encouraged to pile on yet more debt at low rates which they then cant pay back when rates rise.
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Dandandat
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ds9074
Jan 7 2008, 02:35 PM
I've read a couple of articles now saying the seeds of the credit crisis were sown in the very low interest rates used to prevent recession after the dot-com bubble burst.

Now in this article there are calls for lowering rates again to avoid recession.

Surely if it acted to store up problems once it not a great idea to try it all over again. The last thing people need to do is be encouraged to pile on yet more debt at low rates which they then cant pay back when rates rise.

The seeds for the current credit problem where sown in the 1980’s when bank regulations became less useful due to Banks changing their lending practices. You are correct though that the low rates at the turn of the millennium caused the current real-estate bubble. The ‘bursting’ of that bubble coupled with the new banking practices caused the current liquidity problem in the credit market.

Those calling for lower interest rates are those who would directly benefit from it. They aren’t looking long term and so don’t care about what might happen 10 years from now. They want to avoided recession next year. They function on the school of thought that Federal Government ought to save them from recession and not let the free market run its course. The only tool the Federal Government has to do that (aside from mind games) is to lower interest rates. Its not interiorly wrong, and just because something similar happened 10 years ago does not mean the same thing will happen again. Key factors are different they would claim. “It’s different this time” is a popular saying.

However what is not different is that the banking practices that have caused this problem in this first place are not being corrected by Federal decree and the Federal government is not even making a big deal about it. There for the most important Key factor is not being forced to correction.

The argument can be made that the major Banks are correcting their lending practices on their own with out Federal intervention. Which may or may not be true, the nature of the system makes it difficult to know if the Banks are doing so and the current problem that they created makes if difficult to believe them.

So things very well could be different this time or they might not be.

The Federal Reserve is being a little more cautionary. The current chairmen Ben Bernanke doesn’t seem to want to lower rates as fast as the market want’s him to. He is not eager to make the same mistakes as his predecessor. He is in a dammed if you do dammed if you don’t position however. He will be blamed for letting the recession manifest itself if he does not cut rates and a recession ensues and he will be blamed if he creates another bubble by lowering the rates to low. What he needs to do is lower the rates just enough to save off recession but not create the next bubble, and that might be an impossible endeavor.

I am of two minds on the issue, a recession might be just what the doctor ordered. It may have the effect of forcing the needed change that is required. On the other hand I stand to gain from inflation.
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Dandandat
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Time to put something here
What is interesting to note is that 50%+ chance of a recession is not a 50/50 as it sounds. As you credibly predict a recession percentage closer to 100% the more your prediction contributes to the recession occurring. It eventually becomes a self fulfilling prophecy.

If for example their was a credible prediction of recession placed at 90%, then people would panic and go into a massive sell off that would create a recession. In this case a 99% prediction might as well be 100%. It is inevitable and unavoidable due to the nature of man.

The same may be true for 95%, to a less sure degree or 90% or 85% or 80% and so on.

There for a 50% prediction can’t always be weighed to the idea that 100% is the top of the scale. The top of the scale is some unknown percent between 50% and 100%. After that tipping point the recession is inevitable.
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