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American Economic Meltdown
   
But conditions suggesting a slowdown have been taking shape: The labor market cooled last year, creating new jobs at roughly half the rate of 2006. Wages grew slower than inflation during the last two months. Early indications suggest Americans were relatively thrifty during the holiday season.
“You have to ask yourself: where does the consumer continue to get his or her spending power ” said Jared Bernstein, senior economist at the liberal Economic Policy Institute in Washington. “If consumption falters, it’s good night nurse for the American economy.”
This is what many economists deem the most plausible of the negative situations that could unfold in 2008: Housing prices fall, consumers tighten up, and companies eliminate jobs in response to declining business, particularly in retailing, restaurants and travel.
Companies curtail investments, cutting jobs in real estate, construction and banking. This takes more money out of the economy, generating a downward spiral of declining activity. In a word, recession.
Those focused on this prospect are concerned by the weakening job market and recent increases in those filing for unemployment claims. In a report last month, Ian Morris, United States economist for HSBC, predicted that unemployment would climb to 5.3 by the end of 2008, up from an average of 4.7 percent in 2007, with the economy generating only about 40,000 nonfarm jobs each month — about one-third the pace for most of 2007.
The prospect of such a development has spurred the Federal Reserve to cut interest rates three times since September, bringing its benchmark rate down to 4.25 percent from 5.25 percent. Cheaper credit generally lubricates the wheels of the economy by encouraging investment and spending.
The Fed has expressed reluctance to continue cutting because of concerns about inflation. But further signs of economic trouble will impel it to keep lowering borrowing costs. And if oil and other commodity prices fall enough this year to dampen fears of inflation, that would give the Fed room to cut interest rates more aggressively.
The economy is rife with surprises, and unexpected good news could step in to provide relief. American consumers, despite their general gloom about the economy, continue to express satisfaction with their personal finances. That could carry the day, as they tap credit cards to finance meals out and trips to the mall, even as housing wealth dries up.
Added support for the economy is likely to come from abroad, sustaining rising exports, which have been propelled by healthy growth everywhere from China and India to Europe and the Middle East. The weak dollar helps make American products more competitive in foreign markets.
A combination of any of these factors might be enough to generate jobs and keep the economy going, regardless of real estate troubles.
Moreover, some economists assert that worries about the housing market are overblown in terms of the effect on the broader economy. While bad news seems certain to continue for real estate agents, construction companies, home improvement stores and anyone else with fortunes tied to demand for garages and ceramic tiles, the economy can continue to grow even with house prices in the doldrums, they say.
In this view, the crucial factor is the availability of credit. The mortgage crisis has made markets skittish about the extent of losses still hiding in the weeds. Lenders have been casting a wary eye at potential borrowers, diminishing the flow of credit to support everything from car purchases to the development of office towers.
If the Fed’s lowered interest rates do the trick, making banks feel more secure, an upward spiral could commence, as fresh lending spurs business and keeps the economy growing. But if jitters persist and banks remain tight, that could snuff out business, cut jobs and send the economy into a tailspin.
“If the credit card is a little harder to come by, that means there’s a little less shopping going on,” said Neal Soss, an economist at Credit Suisse Securities in New York. “If banks go into hibernation and there’s no cash for anybody, then it’s very hard to get the economy to grow with any vigor.”
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