Although few economists believe there’s more than a 50% chance of a recession, the chorus of voices pointing to that possibility is growing, the Centre Daily Times reports.And there are three main factors that could cause that to happen, according to economists: how quickly banks resume readily granting consumers and businesses loans, whether housing prices continue to fall and whether the combination of those two factors puts the brakes on consumer spending.
“We’ve lowered our 2008 growth forecast to 1.5%, down from 2.3% previously and 1.8% in 2007. We now expect a consumer recession for the firm time in 17 years,” according to a forecast report from Merrill Lynch.
“What we’re going through now is unlike anything we’ve seen before,” said former Federal Reserve Governor Lyle Gramley. “All financial crises have their unique characteristic. This one is characterized by a seizing-up in the home mortgage market.”
“The volatility in today’s market is making it extremely difficult to quality borrowers for mortgage loans,” said mortgage broker Dawn Holly. “And the news about Countrywide’s woes doesn’t make the picture any brighter.”
Because of the worsening mortgage crises, banks are tightening credit for some businesses, as well. “None of us knows for sure how much credit availability has declined,” Gramley said, “but to be sure, it is substantial.”
Thus, if businesses don’t borrow, they don’t grow, and it they don’t grow, the 4.6% unemployment rate will rise.
And if stock prices continue to fall, that, too, will contribute to a curtailment in consumer spending.
“Consumer spending depends on wealth, because if wealth contracts or asset prices fall, it undermines the growth of retail sales and other consumption, and that’s two-thirds of GDP,” said Joel Prakken, chairman of Macroeconomic Advisers.
Meanwhile, as the market tumbled last week, Russ Koesterich, a portfolio manager at Barclays Global Investors, characterized the slide as “classic financial contagion. You’ve got people in multiple markets. Losses in one force them to capitulate in others,” he told The San Francisco Chronicle.