Friday, December 1, 2006

Economic Storm Signals: PAUL KRUGMAN - Tough 2007

THE COMPLETE ARTICLE
The New York Times

OP-ED COLUMNIST
By PAUL KRUGMAN

Economic Storm Signals

Published: December 1, 2006

The odds are very good that 2007 will be a very tough year.

"It's tough to make predictions," Yogi Berra is supposed to have said, "especially about the future." Actually, his remark makes perfect sense to economists, who sometimes have trouble making predictions about the present. And this is one of those times.

We're now two-thirds of the way through the fourth quarter of 2006, so you might think we'd already know how the quarter is going. Yet, economists' assessments of the current state of the U.S. economy, never mind the future, are all over the place.

And here's the bad news: this kind of confusion about what's going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession (or vice versa). At turning points, the various indicators that usually tell us which way the economic wind is blowing often point in different directions, so that both optimists and pessimists can find data to support their position.

The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession. If that sounds ominous, it should: the bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year.

Before I explain what the bond market is telling us, let's talk about why the economy may be at a turning point.

Between mid-2003 and mid-2006, economic growth in the United States was fueled mainly by a huge housing boom, which created jobs directly and made it easy for consumers to spend freely by borrowing against their rising home equity.....

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