Washington – The dreaded “R” word – recession – is back in play, contributing to Tuesday’s stock-market plunge.
But is recession a real possibility? Many analysts say recession is unlikely this year and that Tuesday’s market sell-off was long-anticipated and would be short-lived as the economy rebounds from a housing slump. Also helping the economy are renewed consumer and business spending, a strong but not overheated labor market and possible intervention by the Federal Reserve, analysts say.
“The economy is percolating along pretty well except for the housing sector,” said Edward Leamer, director of the University of California at Los Angeles’ Anderson Forecast, adding, “We don’t see anything in the data that we monitor that suggests the economy is having any real trouble.”
Stanford University economist John Taylor said Tuesday’s stock-market drop may restore some volatility to what has been an unusually stable stock market, but it is not a reflection of economic troubles.
“If you look at the overall economy, both U.S. and global, you see continued growth,” Taylor said.
Former Federal Reserve Chairman Alan Greenspan on Monday suggested that a recession could come by year-end. And recent data, including a surprisingly weak durable-goods report Tuesday, suggest the economy has not rebounded as strongly as some had expected.
Nouriel Roubini, chairman of Roubini Global Economics in New York and a professor of economics at New York University, had predicted a recession to begin in the first or second quarter of this year and said Tuesday’s market downturn provided more evidence of impending doom.
The government today is expected to sharply lower its estimate for growth in last year’s fourth quarter, down to 2.5 percent annually from 3.5 percent last month.
Keitaro Matsuda, senior economist at Union Bank of California in San Francisco, said he doesn’t see the economy slipping into negative growth “any time soon.”
A recent dip in interest rates, helped by Tuesday’s sharp bond-market rally, raises another possibility: that the Fed might come to the slowing economy’s rescue and cut rates. Concerns about possible blowups in the subprime mortgage market could encourage the Fed to cut rates after pausing last summer in its campaign of raising interest rates to fight inflation.
