Our Great Recession Obsession

We are all waiting, it seems, for the next recession. Everyone knows that the business cycle hasn't been repealed, and so another recession is inevitable sooner or later. Some indicators now suggest that it might be sooner. The Conference Board's Consumer Confidence Index has declined for three straight months. In March, 30 percent of respondents said jobs are "plentiful"; now that's only 24 percent. All this inspires much hand-wringing and foreboding, because in our political and media culture a recession is regarded as a calamity, or something close to it.

Just last week, the Federal Reserve cut its key overnight interest rate for the second time since August. It now stands at 4.5 percent, down from its recent peak of 5.25 percent. If there's a recession, Fed officials know that they would shoulder at least part of the blame. Although the economy grew at a strong 3.9 percent annual rate in the third quarter, most economists regard this as an aberration. They expect slower growth or a recession, because three powerful forces are now assaulting the economic expansion.

Let's survey the threats.

First, housing. Its collapse deepens. Economist Richard Berner of Morgan Stanley notes that sales of new and existing homes have dropped 42 percent and 30 percent, respectively, from their peaks of more than two years ago. New-home starts are 47 percent below their peak of January 2006 and are still declining. As supplies of unsold homes grow, real-estate prices continue to fall. The Case-Shiller index (named after its creators, economists Karl Case and Robert Shiller) finds that prices in August were down 4.4 percent nationally from a year earlier. Of the 20 metro areas surveyed, only five (Atlanta; Charlotte, N.C.; Dallas; Portland, Ore., and Seattle) had increases. Price drops were 7.8 percent in Miami and 5.7 percent in Los Angeles.

Second, oil prices. Any threat to existing supplies (hurricanes in the Gulf of Mexico, a possible Turkish attack into Iraq) sends them up. They're hovering around $90 a barrel, and analysts openly talk about the possibility of $100 a barrel. Even before the latest price increases, energy costs rose to 6.2 percent of consumer spending in the second quarter from 4.5 percent in 2002, notes Jack Lavery, a former chief economist of Merrill Lynch and now a consultant. Higher energy costs will continue to weaken purchasing power for other goods and services, he says.

Finally, credit problems. As lenders and investors have suffered losses on subprime mortgages—loans to weaker borrowers—they've tightened lending standards for other borrowers. The situation may get worse before it gets better, argues analyst Diane Vazza of Standard & Poor's in a new report. With the economy slowing, she expects bond defaults to rise among shakier corporate borrowers, especially companies dependent on strong consumer spending (retailers, fast-food chains, entertainment firms).