The USA: Heading For Recession?

Recession in America looks increasingly likely. Can booming emerging markets save the world economy? asks The Economist.

“IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: ‘A severe depression is outside the range of probability’. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started.

“Today, most economists do not forecast a recession in America, but the profession’s pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.

“Granted, GDP grew by a robust 3.9%, at an annual rate, in the third quarter. Granted also, revisions may well push this figure up. But that was the past. More timely signs suggest that the economy could stall in this quarter. By early next year, output and jobs could be shrinking. The main cause is the imploding housing market.

“Experts said that house prices could never fall nationwide. But fall they have, by 5% in the past 12 months. Residential investment has collapsed, but a glut of unsold homes means that prices have much further to drop. Americans’ spending is likely to be dented much more by a fall in house prices than it was in 2001 by the stockmarket’s collapse. With house prices lower and credit conditions tighter as a result of the subprime crisis, households can no longer borrow against capital gains to support their spending.

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