Toronto Star

U.S. recession odds top 50%, economist says

Harvard’s Feldstein getting less optimistic

- STEVE MATTHEWS BLOOMBERG NEWS

NEW ORLEANS— The odds of a U.S. recession are more than 50 per cent after a report showing the unemployme­nt rate has jumped, Harvard University economist Martin Feldstein said yesterday. “We are now talking about more likely than not,” Feldstein, president of the National Bureau of Economic Research, which dates economic cycles in the U.S. “I have been saying about 50 per cent. This now pushes it up a bit above that.” The jobless rate rose to 5 per cent in December, the highest in two years, from 4.7 per cent 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 extreasury 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 in New Orleans, where he is to speak at an economics panel discussion on productivi­ty that is 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.”

The U.S. economy, the world’s largest, grew at a 1 per cent pace in the fourth quarter after expanding at a 4.9 per cent 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 per cent.

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

“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 per cent in November from October and were 48 per cent below their January 2006 peak, according to a U.S. 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.

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