4 Reasons To Worry About The Economy

China inflation i
Frederic J. Brown/AFP/Getty Images
China inflation
Frederic J. Brown/AFP/Getty Images

A few months back, the economist Mark Zandi told us that the U.S. economy would probably be back on its feet by the end of 2011.

I talked to Zandi last week to see if he still feels that way. He does.

He said he expects the job market to pick up in the next few months, and the housing market to be healthier by the end of the year.

But he cited four things that could still knock the U.S. economy off track.

1. Housing

Home prices are still falling in the U.S., according to the latest indicators. "It makes me nervous," Zandi says.

The key to housing, he says, is the percentage of home sales that are foreclosures and short sales. The economy won't feel healthy until that percentage falls to a more normal range.

Our interview with Zandi from December has lots more on housing.

2. Europe

Zandi thinks the leaders of the euro zone need to do more to bail out member countries that are in debt trouble. "I think they will do more. But until they do, I won't feel great about that." Worries over debt trouble in Europe rippled into the U.S. last spring, slowing the economic recovery here.

Those worries abated a bit with the bailouts. But the bailouts just add to European debt burdens. So wouldn't more bailouts just postpone the problem?

Yes, Zandi says — but he argues that it's good idea to "kick the can down the road three, four years," because Europe's economy is likely to be in better shape then, and better able to weather sovereign debt troubles.

3. China

Inflation in China is rising. A real estate bubble may be forming. Chinese leaders are trying to manage the situation, but "they're doing it with one hand tied behind their back," Zandi says.

"The most obvious, logical" way to fight inflation would be to let the value of their currency rise against the dollar. That would fight inflation directly, by making imports cheaper for Chinese buyers. It would also cool the economy by slowing China's exports — which is why China's reluctant to move too fast.

China is now the world's second biggest economy, and an increasingly important market for U.S. companies. GM, for example, sells more cars in China than in the U.S. So if China doesn't have a soft landing — if, say, housing and stock prices in China crater — it would have serious repercussions for the U.S., and the world.

4. State and local governments

Like lots of other economists, Zandi's worried about the finances of state and local governments. "There could be a rash of small municipal defaults that could make investors nervous," he says. So he includes them on his short list of things that could go wrong this year.

Still, Zandi thinks some dire predictions for state and local finances are overblown. "It's hard to construct a scenario where a state actually defaults," he says.

What's more, he adds, many states are starting to see higher tax revenues and are cutting spending. "I think things are improving," Zandi says.



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