Mixed Reports Emerge on U.S. Economy
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RAY SUAREZ: Margaret Warner has the economy story.
MARGARET WARNER: Today’s new job growth report adds another layer to this week’s mixed economic picture. The closely watched barometer of economic health showed a surprisingly strong gain of 166,000 new jobs last month. It followed Wednesday’s Commerce Department report that the economy expanded in the third quarter at an annual rate of 3.9 percent, faster than expected.
Yet despite a mid-week Federal Reserve interest rate cut, the stock market — after dropping nearly 370 points yesterday — didn’t regain much today. And the price of oil closed today at another near-record high of nearly $96 a barrel.
To help us understand all this, we turn to Nariman Behravesh, chief economist with Global Insight, an economic forecasting firm in Boston, and Nick Perna, managing director of Perna Associates, an economic analysis consulting firm in Stamford, Connecticut.
And welcome, gentlemen, to both of you.
So, Nick Perna, what do these two pieces of good economic news, in jobs and in economic growth, mean about where we really are right now?
NICK PERNA, Perna Associates: Well, Margaret, it says that we’re doing a bit better or considerably better than many of us thought at this juncture. It’s hard to dismiss the job numbers; they look pretty good. The GDP was considerably larger than most forecasters were expecting.
But I think the real question at this point is, where are we headed? We come from a little firmer footing, but, you know, you mentioned $96-a-barrel oil. We’ve got all kinds of issues in the financial sector. And I think that, while this makes us a little more confident and a little more upbeat, we still have a lot of issues that are ahead of us that could slow the economy significantly.
MARGARET WARNER: Nariman Behravesh, first explain why these numbers were surprising. Is it because of the subprime housing and credit crunch?
NARIMAN BEHRAVESH, Global Insight: Well, it’s clear that the U.S. housing sector is in its worst recession in about 30 years, and there have been worries that it’s been spreading to other parts of the economy. So the worry here is that, in fact, we are headed into, at a minimum, a weak patch, a soft patch, if you will, and in a worst-case scenario into a recession.
So the good news, as Nick was saying, is that, in fact, the economy does have a lot of momentum. But I agree with him that this kind of may be the last hurrah of the economy before we enter into a period in which growth could be only 1.5 percent or something like that.
So I think this may be sort of the momentum that we’ve seen, but it’s going to be slowing down, as I said, heading into a period of, at best, maybe 1.5 percent growth.
Avoiding a recession
MARGARET WARNER: So, Nick Perna, just to try to nail this down, it doesn't sound like you agree with many economists who were quoted today as saying, all right, these two pieces of good news mean that we are going to get out of this subprime crunch without slipping into a recession. Do you think that's still a possibility that we could?
NICK PERNA: Oh, yes, I think the way to look at this, Margaret, though, is not saying that this is going to happen or that's going to happen, but to try to put odds on the probabilities, because there's so much up in the air at this point.
So what I would say is that, at this juncture, even with the good numbers we had today, that the odds of a recession are probably, over the next 12 months, are probably something like one in three, or 35 percent, maybe double where they were a year ago, and that the odds of getting through it the way Nariman described it with 1.5 percent GDP growth, which I would describe as sort of a bumpy soft landing, maybe that's a little bit better than even money.
So I think when you've got odds that are that tight, it pays to look over your shoulder, to look back and to look forward, to make sure that you don't make poor decisions.
MARGARET WARNER: So, Nariman Behravesh, bring in now the markets. Despite the federal interest rate cut, they took a big tumble yesterday and were essentially flat today. Are they reflecting the sentiments you all are expressing or something else?
NARIMAN BEHRAVESH: Well, a couple of things to be said. First of all, the markets got way ahead of themselves, in the sense that an economy that's slowing down, all this problem with the subprime sectors, you have to wonder why the markets are where they are. You know, a 13,500 or 14,000 Dow just seems kind of ridiculous, almost.
However, I think the markets yesterday were reacting to the financial news. They were reacting to the fact that there were bad numbers out of many banks, especially Citibank, and they essentially were ignoring the economic numbers, which have been very positive, as we've been saying.
So it's really a reaction to the reports yesterday from the financial sector and the worries that, in fact, this subprime problem, this credit crunch, is going to keep going for a while, that we haven't seen the end of it.
Impact on ordinary Americans
MARGARET WARNER: So staying with you, Mr. Behravesh, what does this mean for ordinary Americans, for the ordinary American in his or her life, what he's going through now or she's going through now, and can expect in the months ahead?
NARIMAN BEHRAVESH: Well, it's a very mixed picture, because on the one hand, you've got a good job situation. Jobs are plentiful. If you want a new job, you got it, basically. The wage situation is also decent. Wages have been finally outpacing inflation. That's the positive side.
On the negative side, you've got this subprime problem. A lot of people who'd like to buy homes can't buy homes. A lot of people who've bought homes have to foreclose, so that's a problem.
Separately, you've got the fact that home prices are dropping. So this whole equity withdrawal that has supported consumer spending is not there anymore. And then, finally, something we haven't talked about yet which is gasoline prices, gasoline prices are high. Oil prices are high. This is creating quite a squeeze on consumer budgets.
So the money is there. The jobs are there. But then you've got all these other pressures on consumer budgets.
MARGARET WARNER: So, Mr. Perna, do agree this is a blinking yellow light for ordinary Americans, so that we are going to see a change in behavior?
NICK PERNA: Yes, I think, to follow up on what Nariman was just mentioning, we have yet to see the full effects of $96- or $95-a-barrel oil. It hasn't been reflected at the pump; it hasn't been reflected in home heating oil prices. So it's yet to be paid, and that's a problem.
Secondly, we've yet to see the full amount of foreclosures that are going to come about because of the chaos in the housing market. So nor have we seen the full extent of declines in house prices.
So this is ahead of us. And I think that these will retard consumer spending growth, and then, in turn, keep corporate profits in check, retard the stock market. So, again, to reiterate what I was saying before, that the slowness is more ahead of us than it is with us right now.
The value of the dollar
MARGARET WARNER: And, Mr. Perna, let me ask you about something in the GDP growth. Quite a bit of it or a good chunk of it was export-related, fueled in good part or in part by the weak dollar. Isn't that a double-edged sword?
NICK PERNA: Yes, it is, to the extent that, you know, number one, if you were traveling overseas, then the weak dollar is not your friend. It cost you a lot more to go to Rome or to Paris than it did a couple of years ago.
The real problem, though, is if the dollar gets too weak, too fast that it spooks the international financial markets, in which case what could happen is that we get a big spike in interest rates in the United States. That happened in the late 1980s.
It could lead to a large enough increase in interest rates to make the housing situation even worse and some of the problems on Wall Street even worse. So it is good news-bad news, depending on how fast it falls. If we continue to have an orderly decline in the dollar, it's one of the things that keeps the economy's head above water.
MARGARET WARNER: And, Mr. Behravesh, your thoughts on that point, that whether this export surge is really good news story?
NARIMAN BEHRAVESH: Well, I think it's, at this point, nothing but good news. I mean, I think Nick pointed out a potential threat from higher inflation and higher interest rates, but we haven't seen that. You know, the dollar has been coming down a number of years. And, in fact, inflation has drifted downward.
So, so far, all the news has been good, in terms of a weaker dollar. I think in this environment where growth is weak, where there's really not serious inflationary pressures outside of oil, I think a weak dollar is not a problem. So I think the net here is a positive, so I'm not terribly worried about a weak dollar.
MARGARET WARNER: Well, I'm not sure whether the two of you have an essentially upbeat assessment now or a downbeat assessment going forward, but then you're both economists. Thank you both very much for being with us.
NICK PERNA: Our pleasure.