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From fourth quarter 2006 to
fourth quarter 2007 real GDP grew by a healthy 2.5 percent (Table
1). The industrial
production coming out of our nation’s factories rose by 1.6 percent over the
same period. Meanwhile short
term interest rates declined from 4.88 to 3.31 percent.
Most alarming, however, was the sharp upward movement in the price
level. The consumer price index
rose by 4.1 percent over the last year.
The main culprits for this rise were escalating energy costs, the
decline of the dollar in the world’s foreign exchange markets, and
some blame the Federal Reserve.
Toward the end of 2007
economic conditions had greatly weakened.
Real GDP grew by only 0.6 percent during fourth
quarter.
In contrast the U.S. Department of Commerce reports
that real GDP grew by a healthy 4.9 percent in the third quarter of 2007.
Thus a dramatic slow down in activity took place
in the fourth quarter.
Many economic analysts believe that the first
quarter of 2008 will also be weak.
Some of the more bearish analysts go as far as
to say that the economy will experience negative growth during the first
part of 2008.
For example, Harvard economist Martin Feldstein
indicates that the probability of a recession has reached fifty percent.
This is significant in that Feldstein heads the
NBER (National Bureau of Economic Research), the organization that
ultimately determines the dates for business cycles.
While it is clear that
the economy has weakened, it is not yet a sure thing that the
U.S.
will enter a recession.
Federal Reserve Board chairman Ben Bernanke has
stated that even though the economic situation has deteriorated the economy
may still avoid recession.
This does not mean that some segments of the
economy are not already hurting.
The home construction sectors and related
manufacturing sectors have been hit very hard by the problems facing the
housing market.
Moreover, the
U.S.
automobile industry is experiencing very hard times as well and for all
intents and purposes is in a deep recession.
The major reason that some are more bullish about the prospects of the
economy in 2008 centers around the belief that, although the sub prime
housing collapse has damaged the economy, the damage may yet be contained.
Their belief is predicated on the vast amount of liquidity that is
being pumped in the economy by the Federal Reserve.
Hopefully the liquidity and the associated decline in interest rates
will counter the effects of the sub prime housing market collapse.
More liquidity and lower interest rates will allow for lower
borrowing costs for businesses and the opportunity for mortgage refinancing
by homeowners. Some say that the
Federal Reserve has not done enough in this regard and should provide
additional liquidity and even lower interest rates to the economy.
Fiscal policy will also play a role
in the government’s efforts to avoid a recession in an election year.
The U.S. Congress and President have enacted a $168 billion stimulus
package. The hope is that the
recipients will spend the dollars and bolster consumption spending.
Critics contend that it will be May before the checks arrive and when
they do, people will end up either saving a large portion of the money or
spend the money on foreign made goods, thus stimulating foreign economies,
not the U.S. economy.
Only time will tell if the economy actually goes into an official
recession. But this is a
technicality as it really does not matter all that much if the economy
contracts by a small percent or increases by a small percent.
The reality is that the better part of 2008 will be a difficult
period for the U.S. economy.
There are fundamental imbalances in the housing market and in our
nation’s financial system. It will
take time for individuals and businesses to clean up their balance sheets.
Then and only then will we be on a path to recovery based on sound
fundamentals. |
