Soft or Hard?

From the Atlanta Journal-Constitution:

Soft landing or hard?

Maybe the economy is coming in for a soft landing. Or maybe you’d better fasten your seat belt and hold on tight.

Most economists seem to agree: The economy, which turned in especially zippy growth during the first quarter of this year, is slowing to “below trend” expansion. And there is general accord on what will follow: leveling off and a return to cruising speed.

A few say the landing will turn to recession.

The sweeping support of the best-case scenario makes Dean Baker scoff. “I went back and looked at the ‘Blue Chip’ forecast in September of 2000. Of 50 economists, six months from recession and not one of the 50 saw it. Not one predicted the recession.”

Barring an unexpected shock, whether we do slip into recession depends on two factors: whether the Federal Reserve keeps raising interest rates until growth stalls and whether the four-year housing boom is petering out.

Baker, co-director of the Center for Policy and Economic Research, puts the chances of recession at about 80 percent.

No one can be 100 percent certain whether we get the soft landing or something more painful. For every sign pointing toward recession, at least another one offers reassurance. But clearly the economy has lately carried some extra burdens: mainly, energy prices and higher interest rates, thanks to the Fed’s campaign of rate increases. Yet, the economy has continued to expand.
…
the business sector,” Hyland said. “That is what’s going to save the economy from a significant slowdown.”

Baker is skeptical: That might cover a mild housing decline, but not something more dramatic.

If housing falls to its levels during the mid-1990s, a boost to business spending will not be enough to compensate. To keep up, the pace of investment would have to double, Baker argued.

Moreover, the economy’s shock absorbers are somewhat tattered. Americans’ debts are near record levels, savings have been negative for the first time since the Depression and the government is already deep into deficit financing.

The biggest threat to a soft landing may not be one huge danger so as much as the weight from several burdens together.

“If we had just high energy prices, if we just had high interest rates — I’d be more confident,” said Roger Tutterow, dean of Stetson Business School at Mercer University. “It is the combination of the two that will really tax the consumers in the second half of this year.”