Recession's Hidden Virtues
We are all waiting, it seems, for the next recession. Everyone knows that the business cycle hasn't been repealed, and so another recession is inevitable. Some indicators suggest that it might be sooner rather than later. The Conference Board's consumer confidence index has declined for three straight months. In March, 30 percent of respondents said jobs are "plentiful"; now that's only 24 percent. All this inspires much foreboding, because a recession is widely regarded as a calamity or something close to it.</br></br>Just last week, the Federal Reserve cut its key overnight interest rate for the second time since August. It now stands at 4.5 percent, down from its recent peak of 5.25 percent. Although the economy grew at a strong 3.9 percent annual rate in the third quarter, most economists regard this as an aberration. They expect slower growth or a recession, because three powerful forces are assaulting the economic expansion.</br></br>First, housing. Its collapse deepens. Economist Richard Berner of Morgan Stanley notes that sales of new and existing homes have dropped 42 percent and 30 percent, respectively, from their peaks of more than two years ago. As supplies of unsold homes grow, real estate prices continue to fall. One index finds that prices in August were down 4.4 percent nationally from a year earlier.</br></br>Second, oil prices. They're approaching $100 a barrel. Even before the latest price increases, energy costs rose to 6.2 percent of consumer spending in the second quarter; that's up from 4.5 percent in 2002, notes consultant Jack Lavery, a former chief economist of Merrill Lynch. Higher energy costs will continue to weaken purchasing power for other goods and services, he says.</br></br>Third, credit problems. As lenders and investors have suffered losses on subprime mortgages -- loans to weaker borrowers -- they've tightened lending standards for other borrowers. With the economy slowing, Diane Vazza of Standard & Poor's expects bond defaults to rise among shakier corporate borrowers, especially companies dependent on strong consumer spending (retailers, fast-food chains, entertainment firms).