No Reason for Jitters
Former Federal Reserve Chairman Alan Greenspan initially raised the specter of a recession at the end of 2007, then said it was not probable. In fact, the American economy seems in pretty good shape. Most forecasters believe we will grow well into 2008, even if there is some slowdown. The long-feared housing contraction has not produced any significant spillover. Inflation remains low, real consumer spending is firm, unemployment is low, real business investment is rising, and growth in government spending is steady.
Yes, the weaker housing market raises problems, but they seem manageable. The true risk lies in adjustable rate mortgages. Households will suffer pain when ARMs are reset and, according to the Mortgage Bankers Association, somewhere between $1 trillion and $1.5 trillion worth of ARMs will reset this year. However, this extra interest cost is manageable for the overall economy, representing less than two tenths of 1 percent of personal incomes. The Federal Reserve itself has pointed out, there may be a more favorable outlook regarding both inflation and growth into the middle of this year. As for the world economy, there has been no currency crisis, no systematic financial breakdown, and no economic meltdown.
As Morgan Stanley's economists put it, "While these [adverse] developments increase the downside risks surrounding the outlook, they don't materially change it," given healthy consumer income gains and still-vibrant growth abroad.
All in all then, around the world, as the bounce-back in the stock market has proved, we did not have a crash but only a contraction, and a modest one at that, amounting to less than 5 percent of the Standard & Poor's 500 index. Let us draw comfort from the assessment that it is better to have wary investors than reckless ones.
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