subprime time?
by STAFF
Investor's Business Daily, Inc.
Economy: We've been quite bullish on U.S. economic prospects, and still are. But we're not Pollyannas. All it takes is one mistake and the economy can tank. Hopefully, the Fed agrees. If not, we're all in trouble.
Forward-looking data on the economy haven't been very bullish of late, and Friday's jobs report — showing August payroll employment fell by 4,000 positions — was downright bearish. The drop was the first in four years and stunned experts who were looking for an increase of 112,000 or so.
Even worse, the solid job gains previously reported for June and July were revised down by 81,000, an ominous sign for growth.
A very strong link exists between jobs and the overall economy. After a more than respectable second quarter, when GDP grew a healthy 4%, the third quarter is shaping up as weak. With August jobs just 1.1% ahead of a year earlier, it's not out of the question that GDP could contract.
We're not the only ones having a bipolar moment here. "The behavior we are observing in the last seven weeks," former Fed chief Alan Greenspan said Thursday, "is identical in many respects to what we saw in 1998, and we saw in the stock-market crash of 1987."
Greenspan should know. He was the nation's top central banker during both episodes, and both led to recessions.
The R-word is heard a lot these days because of deterioration in financial markets. This is the fifth year of expansion, but many factors that have driven our growth — low interest rates, a housing boom, soaring stocks, an improving job market — have turned negative or gone soft.
Wall Street is taking out its sharpest pencils and revising forecasts. The respected Macroeconomic Advisers service says the risk of a recession is "still" less than 50%. But that's cold comfort.
Investors are a bit more wary. The Intrade.com Web site — which lets investors bet on key economic events (see chart) — now sees a 46% chance of recession by the end of 2008.
Why so gloomy all of a sudden? The immediate cause is the turmoil in the housing market. Housing now accounts for over 6% of total GDP, the most since 1951. When it hurts, the economy hurts.
Most analysts saw limited impact from the subprime housing mess. But the bad loans that were bundled and sold into collateralized debt obligations seem to have spread across global financial markets, affecting even Europe and Asian funds and banks. The impaired balance sheets have led to a global credit crunch.
President Bush and Ben Bernanke's Fed deserve credit for not sitting on their hands in a financial crisis. But more can be done.
Those who say a rate cut won't help are wrong. Such a move would be a strong signal that the Fed intends to keep the economy from going under. It almost goes without saying that the fed funds rate should be cut 50 basis points to 4.75% now, but certainly no later than the Fed's meeting on Sept. 18.
Source: Investor's Business Daily