- The Washington Times - Monday, August 20, 2007

Pessimism is a contagious affliction, born by fears of a cataclysmic result that is based on little or no compelling evidence — usually in the face of a pile of facts to the contrary.

That’s the illness that spread through Wall Street last week, triggered by the continuing turbulence in the housing and credit markets amid fears the situation will only worsen and drag the rest of the economy down with it.

Some of the gloomiest traders on Wall Street have begun, once again, to talk about a recession, the dreaded r-word that rears its ugly head whenever the stock markets go through their usual corrections — which is what’s happening now.

Cooler heads advise that, for the time being, the housing troubles have not spilled into the economy at large. That’s because the fall in home sales and the concurrent collapse of the subprime-mortgage market represents a small fraction of our $13 trillion-per-year economy.

This is not to say the credit crunch can’t get worse. The torrid housing boom of the last several years led to a frenzy of irresponsible mortgage schemes offering little- or no-interest or no-down-payment deals and short-term adjustable-rate mortgages to poor credit risks.

Thus far, an estimated 20 percent to 30 percent of them have fallen through, and that could go higher when interest-payment resets kick in over the next two to three years. The implosion of these types of loans has dried up the money flow to lenders, forcing the Federal Reserve Board to provide additional liquidity to the banking system during this rough patch.

But this still begs the question: Does the housing credit crunch endanger the larger economy? The evidence suggests it does not. Indeed, there’s a mountain of evidence that the economy is stronger, despite the temporary housing illness. A few examples:

c The economy, in the middle of the subprime mess, grew by a strong 3.4 percent in the second April-June quarter, driven by stronger consumer demand, increased exports and an uptick in manufacturing output.

c Employment continues rising, with the jobless rate now at a low 4.6 percent. More Americans are working than at any time in our history. Wage growth has rebounded.

c A large decline in gasoline prices last month helped hold consumer prices to their lowest in eight months. Prices rose a mere 0.1 percent in July, and the core rate of inflation, excluding volatile energy and food, has risen a tame 0.2 percent for the last two months.

c The big news from a key sector of the economy: The Fed reported industrial output rose 0.3 percent last month, following a solid 0.6 percent rise in June. July’s increase was fueled by a 0.6 percent rise in manufacturing, the second consecutive increase at this rate.

“Analysts believe U.S. factories, after being hit by a slowdown late last year, are starting to revive the economy in spite of continued troubles in the housing sector,” Associated Press economics writer Martin Crutsinger reported last week. Stronger global growth is a big factor behind the faster factory output. We are selling more abroad, which, the government reported this month, has been driving down the trade deficit.

c Another sign of the economy’s health is last week’s report that the budget deficit is falling faster than expected. Tax revenues have been flowing into the Treasury at higher-than-forecast levels as a result of growing employment and rising corporate earnings.

c There’s even a bit of hope that the housing sector’s sales decline may be primed for an upturn, according to a report from the National Association of Realtors.

“Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming out in the fourth quarter of 2006,” said NAR senior economist Lawrence Yun. “Recent disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets.”

Story Continues →