Correction? Or recession?

Arkansas Business, Dec 3, 2007

THE PAST FEW WEEKS HAVE turned decidedly gloomy for the U.S. economy with little if any positive news.

Everywhere we turn, we keep hearing about the jittery market that's down more than 10 percent from its high in October, the housing crisis that continues to worsen and the credit crunch, which keeps getting tighter and hitting the big banks hard. Meanwhile, consumer spending, which accounts for three-quarters of the economy, is beginning to slow.

By definition, a market that declines by 10 percent in a short time is a correction, but more and more the "R" word is cropping up. And while many signs do point to a recession, many economists think the economy won't get that bad. Still, they'll admit that the risk of a recession has risen in recent weeks.

The thing about all the recession worry is that it feeds on itself. If everyone thinks there's going to be a recession next year, it will probably happen. Investors become reluctant to put their money at risk, and businesses become reluctant to expand.

Merrill Lynch analysts last week published a research note saying, "We believe we are going to see a recession in '08."

"Right now, the question is how bad it's going to get," David Rosenberg, chief North American economist at Merrill Lynch, told Fortune magazine. "The question is one of magnitude."

Mark Zandi, the chief economist of Moody's Economy.com who was in Little Rock before Thanksgiving for the semiannual UALR Economic Forecast Conference, told the Washington Post that, "In any recession, you get to a tipping point where sentiment unravels and feeds on itself. Psychology takes over."

Others, of course, including the leadership at the Federal Reserve, don't think things will get that bad. Naturally, they're hoping Fed action will keep a recession from happening, while some, however, wonder if the Fed has enough influence to pull it off.

And such prognosticating brings out the doomsayers who see the end of America as we know it. We remain highly skeptical of those who go overboard in their predictions.

What is obvious to all is that, just as Zandi said last month in Little Rock, economic growth is slowing, but the Arkansas forecast is less gloomy than the national outlook.

Zandi tried to give some hope by listing some factors that should keep the United States out of a recession.

* Businesses outside of the housing industry are stable;

* The corporate profit margin is 12 percent and companies have lots of cash;

* The trade balance has gone from a drag on the economy to being a plus, and the devalued dollar aids trade and contributes to real GDP growth;

* Global growth remains broad-based; and

* Policymakers are engaged--the Federal Reserve has lowered its funds rate and is likely to do so again.

Bottom line? If all that's happening keeps you from sleeping at night, review your investments. Call your financial planner and go over your goals. Some will see an opportunity to invest more, while others may want to move money around to play it safer.

While the risk of recession is higher than it has been in some time, we've weathered them before. They seem to come in cycles. If one happens, Americans will learn to cope.