US Economists Raise Recession Probability Factor

14 September 2007

NEW YORK: In August a Wall Street Journal poll of fifty-five leading US economists estimated the likelihood of a national recession at 28%. One month on, in the wake of last Friday's report on August employment, their pessimism increased to 35%.

The pundits' gloom was deepened by the latest data from the Bureau of Labor Statistics which revealed the first monthly jobs decline in four years.

David Wessel, global economics editor at the WSJ, says its survey reflects a broad range of opinion on the US economic forecast.

Majority opinion perceives the most likely economic scenario to be a substantial slowdown in growth, rather than outright recession.

On average, those surveyed predicted that GDP would rise at a 1.9% annual rate in the fourth quarter, substantially less (by 31.5 percentage points) than the 2.5% rate estimated in August.

In the first quarter of 2008, they see growth at 2.1%, down from an earlier estimate of 2.6%.

But as the WSJ points out: "The [expectations] range highlights an intense argument over whether the housing and financial problems will infect the broader economy. Will the tightening credit conditions damp business investment and hiring? Are consumers set to reduce their spending?

"If so, is the global economy, and its appetite for American goods, robust enough to make up for any drop in demand in the US?"

Among the economic Panglossians surveyed is Michael Mussa, a senior fellow at the Peterson Institute for International Economics.

He posits that a key factor influencing the onset of recession is whether the housing slump hits consumer spending progressively - or "if it comes all in a big rush."

Given the former scenario, Mussa predicts that "if we have a recession, it's likely to be a relatively brief and mild one".

But Desmond Lachman, resident fellow at the American Enterprise Institute is among the Cassandras, rating the odds on a recession at 75%.

"The economy is now being hit by big shocks [housing, the credit crisis and energy prices]. Whether it's a deeper recession or not depends on what the [Federal] policy response is."

Data sourced from Wall Street Journal Online. additional content by WARC staff