From the Wall Street Journal:
Debt Issues Top Economists’ Fears
Terrorism Falls in Poll On Short-Term Threats Amid Market Turmoil
By SUDEEP REDDY and KELLY EVANS
August 27, 2007; Page A2
The combined risk of mortgage defaults and heavy debt loads has overtaken terrorism as the biggest short-term threat to the U.S. economy, according to a survey of economists being released today.
The National Association for Business Economics says almost a third of its survey respondents listed debt-related problems as their top worry: About 18% cited the effects of subprime-loan defaults and 14% listed excessive household or corporate debt.
About 20% of the 258 members responding put defense concerns and the possible economic disruption of a terror attack at the top of their list, down from 35% in the group’s March survey. Energy prices were the top-cited risk among 13% of the group, which largely includes economists working at U.S. corporations or with think tanks and universities.
The poll results, collected from July 24 to Aug. 14, reflect early worries about the turmoil spreading through equity and debt markets in recent weeks. Defaults tied to riskier home loans soared this year, devaluing mortgage-backed securities and spurring a pullback from many lenders. The ensuing crisis has spurred worries of cutbacks in business and consumer spending.
Forecasters are starting to shave their growth forecasts for this year as a result of the market turmoil. They are discussing the odds of a recession, which they say is avoidable if the Federal Reserve cuts interest rates. The economy grew at a strong 3.4% annual rate in the second quarter after almost stalling in the first three months of the year with 0.6% growth.
Peter Hooper, chief economist at Deutsche Bank Securities, said growth in coming quarters would be trimmed “if we don’t get some snapback [in markets] pretty soon. The odds of recession have gone up,” he said. “We were thinking they were one out of four; maybe they’re closer to one out of three.”
The housing market has also restrained economic growth, with construction activity easing and household wealth declining because of falling prices in many areas. However, the business economists’ survey says the five-year outlook for housing “remains largely positive.” About 42% of those responding said they expect U.S. home prices over the next five years to be flat, on average, while 41% expect price increases. Just 16% expect price declines.