Sunday, January 6, 2008

Feldstein Says Recession Odds Now Higher Than 50% (Update1)

By Steve Matthews

Jan. 6 (Bloomberg) -- Harvard University economist Martin Feldstein, head of the group that dates economic cycles in the U.S., said the odds of a recession are more than 50 percent after a report showing the unemployment rate jumped.

``We are now talking about more likely than not,'' Feldstein, president of the National Bureau of Economic Research, said in an interview yesterday in New Orleans. ``I have been saying about 50 percent. This now pushes it up a bit above that.''

The jobless rate rose to 5 percent in December, the highest in two years, from 4.7 percent in November, a government report showed last week. Payrolls rose by 18,000, the least since August 2003.

The U.S. economic expansion is cooling after a third- quarter surge as the housing slump enters its third year and consumer spending slows. Former Federal Reserve Chairman Alan Greenspan and ex-Treasury Secretary Lawrence Summers are among those raising the prospect of a recession.

The rise in joblessness will hurt consumer confidence, Feldstein said in the interview. He was in New Orleans to speak at an economics panel discussion on productivity that was part of the annual meeting of the Allied Social Science Associations.

``Consumers, with essentially no growth in jobs in December, are going to be more nervous about the future,'' said Feldstein, 68. ``They are going to be a little more reluctant to spend, and that is going to put a further drag on growth in 2008.''

Growth to Slow

The U.S. economy, the world's largest, grew at a 1 percent pace in the fourth quarter after expanding at a 4.9 percent rate the previous three months, according to the median estimate of economists surveyed by Bloomberg News last month. Growth for all of 2008 is projected at 2.3 percent.

The Federal Reserve has cut its main interest rate three times since Sept. 18, to 4.25 percent from 5.25 percent. The next meeting is on Jan. 29-30.

``They have to keep lowering rates,'' Feldstein said. A reduction of half a percentage point in the federal funds rate, which banks charge each other for overnight loans, would ``not be a bad thing at this point.''

Rate cuts alone may not be enough to keep the economy growing, Feldstein said. He said Congress may have to cut taxes to stoke consumer spending and restore confidence.

Problems of Confidence

``I am not sure that reduction in rates is going to have as much traction as it did in the past because so much of the problems now are problems of confidence in the financial sector and of bank capital,'' he said. ``So that is why I have been saying we need some kind of a fiscal stimulus.''

Housing starts fell 3.7 percent in November from October and were 48 percent below their January 2006 peak, according to a Commerce Department report last month.

``Housing starts have collapsed, so you have low construction, low household wealth and that is now beginning to accumulate and to shift over into reductions in the growth of employment and therefore in the growth of incomes,'' Feldstein said.

The bureau's Business Cycle Dating Committee isn't close to meeting to decide whether a recession has started, said Robert Hall, an economist at Stanford University who leads the panel.

``The committee operates retrospectively,'' Hall said in an email response to a question about the committee's plans. ``As a general matter, we don't meet until it is reasonably clear that a downturn has occurred,'' he said. ``We are nowhere near that point today.''

Feldstein has headed the NBER, which like Harvard is based in Cambridge, Massachusetts, since 1984. He also served in the post from 1977 to 1982. Feldstein plans to step down from the NBER in June to conduct more research on his own, his assistant, Norma McEvoy, said in September.

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