More on Economics

This is a minority view so far, but I am a contrarian usually. From Knight Ridder.

WASHINGTON - Economic forecasters and Wall Street analysts are quietly hedging their bets after months of rosy reports about a vibrant U.S. economic outlook. They're now mentioning the growing possibility of recession ahead.

Why? Soaring gasoline prices, nightmarish home-heating costs this winter, plunging consumer confidence, rising interest rates and falling new-home sales.
"People are starting to hedge bets. Obviously it's an uncertain time," said Jay Bryson, global economist for Wachovia, the big bank based in Charlotte, N.C.

Ed Yardeni, a veteran Wall Street seer who's now with Oak Associates Ltd., rose to prominence in years past largely on bullish forecasts, but since Rita hit, he sounds decidedly bearish.

"The U.S. economy has been remarkably resilient in recent years, but consumers may start to postpone discretionary spending to build some cushion to pay their higher heating bills on top of paying more to fill up their gasoline tanks," he wrote to investors this week. "In other words, I am not sure that the economy is resilient enough to withstand the one-two punches from the Katrina/Rita tag team."

Yardeni said it was "increasingly likely" that the U.S. economy soon could face a six-month bout of stagflation - in which prices rise but wages and hiring stagnate - the economic curse of the 1970s.

Much gloomier is Philip Verleger, a veteran energy analyst at the Institute for International Economics, a nonpartisan research center. He predicted today's energy crunch more than three years ago, and now sees an economy saddled with dangerous parallels to President Lyndon B. Johnson's in the mid-1960s.

LBJ launched his ambitious Great Society domestic-spending program while fighting a costly war in Vietnam. The economy couldn't underwrite it all, leading to tax hikes, price spikes and a 15-year battle to control inflation. Today's parallel is costly wars in Iraq and Afghanistan, the rebuilding of the Gulf Coast and soaring federal deficits.

"This is the setup for 1966, 1967, 1968," Verleger said, pointing to pledges by the president and lawmakers to spend whatever it costs to rebuild the Gulf Coast. "If Congress goes ahead and spends another $200 billion and doesn't pay for it, it's just what LBJ did."

Economist Nigel Gault, with Global Insight Inc., in Boston, expects a slowdown, but only a short one - probably.

"The reason it (recession) gets mentioned ... (energy price) movements of this sort of magnitude usually would be associated with recession. So you do have to start asking the question," Gault said. "The question needs to be asked, even if we think things are different on this occasion."

The article goes on to present a few optimistic views before the pessimistic concludion. There may be some mitigating factors, but they strike me as unlikely to change the overall direction of economic events. I'm betting on a recession, with possible stagflation in the near future.