A 2008 contraction?

OPINION:

Despite an extremely aggressive monetary policy that has slashed the Federal Reserve-controlled overnight interest rate from an inflation-adjusted 3.25 percent in August to a negative 1.75 percent today and despite a typically irresponsible fiscal policy that will generate a unified budget deficit above $400 billion and add more than $700 billion to the national debt in fiscal 2008, the United States now seems destined to slip into a recession this year, if it has not done so already. If the past is any guide (the Republican Party lost the White House in 1960, and Democrats lost the White House and the Senate in 1980 as recession afflicted both election years), then the political ramifications of an economic contraction in 2008 are potentially overwhelming.

Following an onslaught of cumulatively terrible economic news in recent weeks, Fed Chairman Ben Bernanke finally had to admit on Wednesday that “a recession is possible.” Having unveiled one relatively optimistic economic forecast after another since last summer, Mr. Bernanke acknowledged in testimony before the Joint Economic Committee that the nation’s economic outlook had weakened since the Fed issued its last forecast in January, which projected that the economy would expand between 1.3 and 2 percent during 2008. “We’re slightly growing at the moment,” Mr. Bernanke told the committee, “but we think that there’s a chance that for the first half [of 2008] as a whole there might be a slight contraction.” We think Mr. Bernanke and the Fed are still too optimistic, though not nearly as delusional as the White House, whose 2008 forecast predicts economic growth of 2.6 percent during 2008.

In recent weeks, the bad economic news has included the following: (1) After declining during the fourth quarter, industrial production limped forward by 0.1 percent in January before falling by 0.5 percent in February. (2) Inflation-adjusted consumer spending, which has been instrumental in keeping the economy growing in recent years, was flat over the December-February period. (3) With personal saving already negative during the fourth quarter, consumers appear somewhat tapped out, especially given the fact that inflation-adjusted per capita disposable personal income was actually less in February than it was in March 2007. (4) After declining 2.3 percent in January, new orders for manufactured goods fell an additional 1.3 percent in February. (5) Not only have new factory orders for consumer goods fallen three months in a row, but orders for capital goods, which shed light on business investment decisions, declined 1 percent in February after plunging nearly 9 percent in January. (6) The Institute for Supply Management reported that business activity in both the manufacturing sector and the service sector continued to contract in March.

Moreover, (7) Total construction spending declined for the fifth month in a row in February, with residential construction spending nearly 19 percent below its year-earlier level. (8) After falling for six months in a row, sales of previously occupied homes increased 2.9 percent in February, largely because banks and other holders of foreclosed properties flooded the market and reduced prices. Existing-home sales were still 24 percent below the February 2007 level. Meanwhile, new-home sales declined 1.8 percent in February and were 30 percent below their year-earlier level. (9) According to the Standard & Poor’s/Case-Shiller housing index for 20 metropolitan areas, average housing prices (a) declined 2.4 percent from December to January; (b) were 10.7 percent below year-earlier levels; and (c) plummeted at an annualized rate of 20 percent during the past three months. (10) After plunging 11.9 points to 64.5, the Conference Board’s index of consumer confidence reached a level normally associated with recessions. Meanwhile, consumer expectations about the future reached a 35-year low. (11) Auto and light-truck sales in March were 12 percent below March 2007 levels, as General Motors and Chrysler sold 19 percent fewer vehicles in March than they sold a year earlier. Ford’s sales were down 14 percent. Even Toyota’s sales fell 10 percent.

On top of the utterly dreadful economic news detailed above, the Labor Department announced on Friday that private-sector payroll employment declined for the fourth consecutive month in March. Previously reported private-sector job losses were revised upward for January (from 26,000 to 79,000) and February (from 101,000 to 109,000). Given the 98,000 private jobs lost in March, the U.S. economy has now shed nearly 300,000 private-sector jobs since the beginning of the year. The labor market has worsened considerably over the past year. During the 12-month period ending in March, only 292,000 private jobs were created. That compares to 1.42 million private jobs created during the previous 12-month period (April 2006 to March 2007) and 2.7 million private jobs created during the 12 months before that time.

The Labor Department also announced that the unemployment rate spiked upward from 4.8 percent in February to 5.1 percent in March. In March 2007, the unemployment rate was 4.4 percent.

Not surprisingly, the latest New York Times/CBS News poll (March 28-April 2) revealed that 32 percent of respondents ranked the economy as “the most important problem facing this country today,” up from 7 percent in October 2006 (before the midterm elections). Only 15 percent selected Iraq or war as the top problem, down from 27 percent in October 2006. By a 71-21 margin — the worst during his presidency — respondents “disapprove• of the way President Bush is handling the economy.” Eighty-one percent “feel things have pretty seriously gotten off on the wrong track.” At the trough of the 1990-91 recession and near the middle of the 2001 recession, only 42 percent and 53 percent, respectively, felt the nation was “on the wrong track.” Voters are in a nasty mood, and as the economy worsens, they will only become nastier.