U.S. economy teetering, but could still avert recession (1/30/2008)

The U.S. economy is sputtering amid a lingering housing slump and growing jitters on Wall Street, but whether a recession lies ahead is still anyone's guess, a trio of University of Illinois economic experts say.

"To summarize the economic situation in one word, it is 'uncertainty,'" says Jeffrey R. Brown, a finance professor and the director of the Center on Business and Public Policy in the U. of I. College of Business.

Brown and economists J. Fred Giertz and Anne Villamil say dark clouds that have hovered over the economy since last year don't necessarily foreshadow the nation's first recession since 2001.

They say four interest rate cuts since September - with another likely when the Federal Reserve Board meets this week - could jolt the sagging economy. So could a $150 billion economic stimulus package proposed last week by President Bush and congressional leaders.

"But the risks of recession are rising," said Villamil, whose research has examined the impact of inflation on public finance. "Financial markets fear that credit problems and lower demand due to reduced consumer wealth and confidence will lead to a decline in spending, corporate profits, employment and output."

The housing downturn and its ongoing impact on financial institutions that have suffered deep losses from sub-prime mortgages are particularly worrisome, she said.

"Housing is an important component of consumer wealth and losses at financial firms are not yet fully known," Villamil said. "The U.S. economy is fundamentally strong, but these problems will provide a drag over the next few quarters and continued stock market volatility.

Brown says the nation's economy could actually grow rather than decline this year, though at best it will still fall short of the 2.2 percent growth rate in 2007.

Which direction it goes depends on several important unknowns, such as whether the sub-prime mortgage meltdown has bottomed out, how tight credit becomes and whether consumer confidence wanes, he said.

"While the recent Fed rate cut of 75 basis points should help in the short-run, the unexpected timing and magnitude of the cut may have also inadvertently damaged consumer confidence by signaling that the economy may be in worse shape than we thought," said Brown, who has served as a senior economist with the President's Council of Economic Advisers.

Giertz, the interim head of the U. of I. economics department, says it's too early to tell whether the economy is simply slowing or in actual decline. But he says a recession, if it comes, likely would be relatively modest.

"Most observers believe that the modern economy is better able to adjust to changing economic conditions than in the past. This means that firms make quick adjustments to changes in their situations that avoid more drastic consequences later on," said Giertz, a professor in the U. of I.'s Institute of Government and Public Affairs.

While the nation's economic policymakers cannot be expected to provide complete economic stability, they should be counted on to avert major problems and, more importantly, to keep minor problems from spiraling into catastrophe, Giertz said.

"The record the last 25 years has been very good in this regard," he said. "We can only hope it continues."

Note: This story has been adapted from a news release issued by the University of Illinois

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