|August 7, 2006
Op-Ed Columnist/New York TIMES
Intimations of Recession
By PAUL KRUGMAN
THESE ARE THE DOG days of summer, but there's a chill in the air.
Suddenly — really just in the last few weeks — people have starting
talking seriously about a possible recession. And it's not just
economists who seem worried. Goldman Sachs recently reported that the
confidence of chief executives at major corporations has plunged; a
clear majority of C.E.O.'s now say that conditions in the world
economy, and the U.S. economy in particular, are worsening rather than
On the face of it, this loss of faith seems strange. Recent growth and
jobs numbers have been disappointing, but not disastrous.
But economic numbers don't speak for themselves. They always have to
be interpreted as part of a story. And the latest numbers, while not
that bad taken out of context, seem inconsistent with the stories
optimists were telling about the U.S. economy.
The key point is that the forces that caused a recession five years
ago never went away. Business spending hasn't really recovered from
the slump it went into after the technology bubble burst:
nonresidential investment as a share of G.D.P., though up a bit from
its low point, is still far below its levels in the late 1990's. Also,
the trade deficit has doubled since 2000, diverting a lot of demand
away from goods produced in the United States.
Nonetheless, the economy grew fairly fast over the last three years,
mainly thanks to a gigantic housing boom. This boom led directly to
unprecedented spending on home construction. It also allowed consumers
to convert rising home values into cash through mortgage refinancing,
so that consumer spending could run far ahead of families' incomes.
(Americans have been spending more than they earn for the past year
and a half.)
Even optimists generally concede that the housing boom must eventually
end, and that consumers will eventually have to start saving again.
But the conventional wisdom was that housing would have a "soft
landing" — that the boom would taper off gradually, and that other
sources of growth would take its place. You might say that the theory
was that business investment and exports would stand up as housing
The latest numbers suggest, however, that this theory isn't working
much better on the economic front than it is in Baghdad.
Signs of a deflating housing bubble began appearing a year ago, but
for a while it was possible to argue that eliminating a bit of "froth"
in the housing market wouldn't do the overall economy much harm. Now,
for the first time, problems in the housing market are starting to
seriously reduce economic growth: the latest G.D.P. data show real
residential investment falling at an accelerating pace. The latest job
numbers show falling employment in home construction, and retail
employment has fallen over the past year, suggesting that consumer
spending is running out of steam. (Gas at $3 a gallon doesn't help,
Meanwhile, neither business investment nor exports seem to be growing
fast enough to make up for the housing slump.
Now maybe we'll still manage that soft landing despite a rapidly
rising number of unsold houses; or maybe there's a boom in business
investment and/or exports just over the horizon. But based on what we
know now, there's an economic slowdown coming.
This slowdown might not be sharp enough to be formally declared a
recession. But weak growth feels like a recession to most people;
remember the long "jobless recovery" that followed the official end of
the 2001 recession?
And what will policy makers do about a slump, if it happens? A snarky
but accurate description of monetary policy over the past five years
is that the Federal Reserve successfully replaced the technology
bubble with a housing bubble. But where will the Fed find another
And with the budget still deep in deficit and the costs of the Iraq
war still spiraling upward, it's hard to see Congress agreeing on any
significant fiscal stimulus package — especially because history
suggests that the Bush administration and Congressional leaders will
turn any debate about how to help the economy into yet another attempt
to smuggle in tax cuts for the wealthy.
One last thing: the real wages of most workers fell during the "Bush
boom" of the last three years. If that boom, such as it was, is
already over, workers have every right to ask, "Is that it?"