Friday, March 30, 2007

Where will the economy go?

According to Fed Chairman Ben Bernanke, it won't go into recession. At least not any time soon. I certainly don't think I can make any predictions with as much certainty as him. Still, that seems like a very optimistic take on the state of the economy. With people in more debt than ever, wages losing to inflation, and the slow stall of the housing market, one wonders what hidden knowledge this report is predicated on. We've also seen a big wave of bankruptcies caused by credit over-extension in the sub-prime lending market as well. Bernanke's not so worried about the effects of this collapse:

On another topic, Bernanke said the growing troubles in the market for risky mortgages thus far doesn't appear to be spreading to the overall economy. "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," he said.

"Although the turmoil in the subprime mortgage market has created financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear," Bernanke said.

But as the article I linked earlier makes clear, the housing market is in a stall. Previously this had been one of the administration's main claims that the overall economy was doing well. Despite every other sector's performance, the housing market was booming. That's over. Here's the main reason Bernanke feels optimistic:

On the other hand, consumers, who proved "quite resilient" despite the housing slump and increases in energy prices, could continue to keep spending at a pace that would make the economy grow faster than currently expected, he said. And, there are other forces, including a still-good jobs market that is producing fatter paychecks, that could push up inflation.

But unfortunately, according the Christian Science Monitor, inflation is eating all those wage gains.

In the past two months, average weekly earnings have fallen in real terms (adjusted for inflation). That marks a reversal from last fall when, thanks to a dip in energy prices, real incomes were enjoying sturdy gains.

Consumers are being buffeted from several directions. The resurgence of inflation comes even as homeowners face a dip in property values and as the stock market has sagged from a recent peak. All this dragged consumer confidence down a notch in an index released Friday by the University of Michigan.

Bernanke may know things about the market that the rest of us don't. Or he may just be putting on a brave face to keep investors from panicking. But right now, to a lot of experienced economists, it looks like we're going to hit a rough patch sometime soon. Pay off those credit cards while you can.

1 comment:

Jeff said...

If you are looking for a downturn, check out the mortgage lending business. Around 14 percent of market share has disappeared (by loan originations). For details, see:

That looks like a recession to me.