Most of the data lining up now say that a recession has either begun or will early in 2008. Alan Greenspan thinks the economy may be headed for stagflation. The credit markets may get worse with further big write-offs at financial institutions. Consumer spending for the holidays appears to be weak. Fuel prices and food prices will take a larger piece out of everyone’s wallet.
It seems that there is not case at all for the economy to keep growing. But, that is not entirely true.
The oil minister of Algeria has indicated that OPEC may increase production as early as February. Certainly the cartel is not anxious to see a financial disaster in the West and in China. A significant up-tick in oil production could drive crude down very fast. That might allow the US to catch the falling knife of ruin in the airline and car industries.
The Fed has to be getting nervous. Who wants to see a blood bath on their watch? The agency has the chance to reduce rates again in January. If things are looking bad, they could go a half a point. They could also take the inter-bank lending rate down more aggressively and "open the window" further for big money center banks that may need the cash at year-end.
Housing is still the most likely straw to break the camel’s back. The government’s effort to freeze rates on some mortgages that are about to reset might save an many as 1.2 million homes from foreclosure. That is about 1% of the households in the US. It might not seem a lot at first blush, but hundreds of thousands of foreclosures would be a fairly big shock to the financial system.
China also has to worry about a sharp downturn in the US. The central government has as much as admitted that an American flu would give China a cold. The Chinese government might decide to make an adjustment to the yuan, as the US Treasury has been begging for. Even a modest adjustment could make a difference. A reset back toward $.12 per dollar on the exchange is certainly possible.
Will all of these things happen in the next quarter? No. But, it may not take all of them to repair much of the damage done over the last six months.
US GDP was stronger than expected in Q3, so it has some momentum. A little more gas might keep it running.
Douglas A. McIntyre
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