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Home > BizTimes Daily > Archives > August 17, 2007
Fed lowers prime rate, but economists fear recession
Published August 17, 2007 - BizTimes Daily
The U.S. stock market rose sharply this morning after the Federal Reserve Bank decided to cut the key interest rate by half a point, easing the market's liquidity worries.
However, with the American housing market on ice, mortgage foreclosures skyrocketing, the subprime loan industry in shambles, the automotive industry in a funk and consumers tightening their belts, some prominent economists are beginning to utter the "R" word.
Real estate expert Ken Rosen, chairman of the Rosen Consulting Group in San Francisco, is calling for the Federal Reserve to intercede with the private banking industry to take actions to stop the rapidly rising levels of mortgage foreclosures in the nation. Rosen says the subprime loan crisis will carry over into the subprime credit card industry, and the country is headed for a recession.
"There's a good chance that we're going to have a recession, unless someone in Washington steps up to the plate and says, 'Stop! We're not going to let all these rates adjust upward. We're not going to let all these foreclosures just happen. We're going to try to do something about it,'" said Rosen, who is chairman of the Fisher Center for Real Estate & Urban Economics at the University of California at Berkely. Hear more about Fisher's views in a webcast at Marketwatch.com.
Pointing to the stock market free-fall earlier this week, Bruce Bittles, chief investment strategist for Milwaukee-based Robert W. Baird & Co. Inc., said, "It would be very rare if the U.S. economy entered a recession prior to a breakdown in the equity markets. The stock market is considered one of the best leading indicators of future economic conditions. Weakness in the housing market that surfaced 15 months ago immediately caused many economists to believe a drop in consumer spending would result, sending the economy into a tailspin. Despite the downturn in the housing cycle, however, consumers continued to spend, and the stock market reached record highs in 2007. Consumer spending is finally showing signs of stress with the reversal in the stock market that has since given up all its gains for the year."
Bittles said that in the debt-based American economy, asset growth is critical to the consumer's ability and willingness to spend.
"As a result, any further weakness in the equity markets would make the economy more vulnerable to recession that at any time since 2000. The weight of the technical evidence argues that investors remain defensive. The stock market is oversold, but the downside momentum is very strong," Bittles said.
Paul Kasriel, senior vice president and director of economic research at Northern Trust Corp., pointed out that Wal-Mart Stores Inc., the largest retailer in the world, warned earlier this week about lower-than-expected quarterly profit and cut its full-year earnings forecast.
"Don't underestimate the U.S. consumer? The global economy is strong? These are two common refrains from mainstream economists who never foresaw a recession until it already had been declared by the NBER (National Bureau of Economic Research) … In order to chum-up sales, Wal-Mart is slashing prices on thousands of items, which, of course, will force its competitors to do the same," Kasriel said. "Although pointy-headed economists continue to be positive on the U.S. consumer, investors have soured on this space … I seem to recall in late 2005 when a similar index of homebuilder stocks was falling that these same pointy-headed economists couldn't see the housing recession forming on the horizon."
The BizTimes Stock Index recovered 2.76 with an afternoon rally to close at 179.42 Thursday, and local stocks rose again with the Fed's announcement today. The largest local advancers this morning were Johnson Controls Inc. (up $2.56 to $107.04) and A.O. Smith Corp. (up $1.96 to $47.15). The largest local decliners this morning were Badger Meter Inc. (down $3.25 to $33.25) and Gehl Co. (down 31 cents to $24.24). The BizTimes Stock Index was created by Small Business Times and is monitored by North Shore Bank. The index, which measures the stock values of publicly held companies based in southeastern Wisconsin, is updated daily and can be viewed at www.biztimes.com.
