US recession risks are getting sharper
September 5, 2007
By Joe Richter and Rich Miller
Washington - The pain from higher credit costs may be spreading as US consumers and businesses follow investors in shying away from risk, raising the odds of a recession.
"While there is no basis for predicting a recession right now, the risks have surely gone up," former treasury secretary Lawrence Summers, now a professor at Harvard University, said yesterday.
"The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater."
Economists at many firms are lowering economic forecasts as the rising cost of credit prolongs the worst housing recession in 16 years.
Two economic areas that held up well so far, jobs and consumer spending, no longer appear immune to the fallout.
Already, the financial turmoil has dented consumer and business confidence, according to surveys last month.
Though reports show a strong start to this year's third quarter, economists will this week be closely watching US car sales and August employment to see whether spending and the job market might follow housing into a slump.
Jonathan Basile, an economist at Credit Suisse, said: "If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets."
Federal Reserve chairman Ben Bernanke is under pressure to cut interest rates this month after the central bank said on August 17 that "downside risks to growth have increased appreciably".
Confidence is critical at key junctures in the economy. If consumers and companies turn more pessimistic about the outlook and cut back on spending, such gloominess can prove to be self-fulfilling, triggering a recession.
"I think there's a significant risk of recession now," said Martin Feldstein, president of the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end. - Bloomberg
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