So who’s right?

From the Indy Star:

Dim housing market could prove pessimists right

The unemployment rate is the lowest it’s been in years; the stock market is at an all-time high; corporate profits are up 17 percent. As we look forward to 2007, the economy appears to be in great shape.

So naturally economists, a professionally gloomy bunch, are worried. In fact, a few of them are even using the “r” word; they expect a recession in 2007. A top Merrill Lynch economist puts the odds of one at 80 percent.
There is, of course, a reason for the gloominess and it can be summed up in one word: housing. The housing market has been severely battered. In October, housing prices were almost 10 percent lower on average than they were a year ago, the largest yearly decrease since 1970. The prices of new homes have taken the worst beating, plunging 33 percent just since April.
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The bust in the housing market is not surprising. I wrote in The Star in June 2005 how in many communities housing prices had risen into the stratosphere. You didn’t need to be a particularly glum economist to believe that at some point those prices were going to have to come back to Earth.

The only question was: Would the housing market cause the economy as a whole to sink? The answer to that question has still not been answered fully, but there are reasons to be pessimistic.
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Still, there are plenty of experts who see nothing like a recession for 2007. In addition to the good employment numbers, they also point to falling oil prices, high corporate profits and an increase in world demand for U.S.-made goods. “The effects of the housing correction will be entirely contained within the housing sector,” claims one economist.
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So who’s right? I don’t have a crystal ball or my own macroeconomic computer model to divine the future. But I think the pessimists make a better case. Housing has fueled consumer spending through home equity loans and represents the most important source of wealth for most Americans. The estimated value of residential real estate is more than $20 trillion, and anything that puts a crimp in that value is going to make consumers more cautious in the future. Admittedly, some cities like Indianapolis have not seen a housing bust, but in much of the rest of country the signs point to even lower housing prices ahead.

Still, the mixed signals probably mean that we will avoid the worst-case scenarios and the economy will avoid recession but limp along weakly through much of 2007. I hope my hunch is wrong and next year will instead prove to be a great one for the economy. It wouldn’t be the first, or the last, time gloomy economists get their forecasts wrong. But the dim housing market, unfortunately, makes it more likely that the pessimists will be proven right.