A Gloomy Forecast for the U.S. Economy
SCOTT SIMON, host:
This is WEEKEND EDITION from NPR News. I'm Scott Simon.
Coming up: Huh, what do you mean? Huh, no cell phone service here. But first, another shaky week on Wall Street.
The NASDAQ had its worst week in six years. The index went down nearly 7 percent in just the last three days. Both the Dow and the Standard & Poor index were down 4.5 percent, and oil prices continued climbing toward a record, the dollar continued to lose value, and the fallout from the subprime mortgage woes continued.
Zani Minton-Beddoes is U.S. economics editor of The Economist and joins us now. Thanks very much for being with us.
Ms. ZANI MINTON-BEDDOES (U.S. Economics Editor, The Economist): My pleasure.
SIMON: Oil price have been going up more or less steadily for the past three months. It didn't quite hit a hundred-dollars a barrel this week but close. Where is the point that the cost of oil begins to affect consumer behavior?
Ms. MINTON-BEDDOES: Well, that is a very big and very important question, and you know what, we've been kind of consistently wrong on that. I mean, oil prices have been going up for a while now. And this time a year ago, I remember writing pieces saying, you know, we were going to hit the level at which it was going to really hurt the consumer, and it hadn't happened. And thus far, the consumer has remained remarkably resilient.
But it seems to me that the combination of several things - higher oil prices, falling house prices, the continued tightening of credit in the wake of the subprime mess - all of that is really going to start weighing on the consumer. And the biggest thing that impacts consumer spending is the labor market - it's wages. And if the labor market is strong, then the consumer can weather a lot of this stuff.
But I actually think, you know, by historical standards, the unemployment rate is still pretty low at 4.7 percent. But the risk is that it rises. And as it rises, wage growth slows and then all of these other things come together. And it starts looking pretty gloomy for the consumer.
SIMON: Is the full impact of the mortgage crisis on the consumer - not to mention the economy, generally - pretty much still ahead of us?
Ms. MINTON-BEDDOES: Yes. We have seen a huge recession in the housing construction. It's still getting worse, but that's where it's being focused thus far. And we've seen relatively little fallout from that into broader consumer spending. And the risk going forward is that the consumer finally slows sharply.
SIMON: The decline of the dollar has helped to boost exports at the same time.
Ms. MINTON-BEDDOES: Absolutely, and that's been a big savior of this economy. And certainly in the third quarter, you had extraordinary export growth. And the fact that the rest of the world, particularly the emerging economies, which are booming, seemed to be growing absolutely like gangbusters coupled with, as you say, the very weak dollar has been very good for U.S. exports. But I think that, in the end, you know, consumption is 70 percent of this economy. So, if the U.S. consumer slows sharply, then that's really what matters.
SIMON: As you indicated, Zani, the unemployment rate is still remarkably low and the job numbers for October were stronger than even some economists had predicted. Is this an unfettered blessing in the economy?
Ms. MINTON-BEDDOES: There are two things about this economy. One is one should never underestimate its resilience. And as I look at the economy now, everything I see looking forward is pretty gloomy. And yet when I look backwards, you know, at the third quarter, which is when the credit crunch really started - credit crunch, as you know, started in the middle of August -and yet that was an extraordinary strong period of growth. It may, in fact, even be revised up because we've had very strong trade figures.
October, as you say, the economy created a hundred and sixty-six thousand new jobs. That does not suggest that the economy is tipping into recession at this very minute. But then you turn around and you look forward and you see the credit woes on Wall Street seem to get ever bigger. That is going to lead to some tightening in credit conditions. It already has done. I suspect there'll be more.
You look at the housing market, and there's really no sense of respite. House prices are beginning to fall. They have a lot further to fall because we have huge inventories of unsold homes. You have oil at the price that it's at. That is going to pass through. You know, we've got winter coming. Never mind next year if it stays at those kind of prices when we have the driving season again. That's got to hit the consumer hard. So I find it hard to see how the consumer can carry on spending in the way that they have been.
SIMON: Well, and, of course, the holidays are coming up.
Ms. MINTON-BEDDOES: And the holidays are coming up. And then when you look at anecdotal evidence from retailers, it's not been great so far.
SIMON: Zani Minton-Beddoes, U.S. economic editor of The Economist. Thanks very much.
Ms. MINTON-BEDDOES: My pleasure.
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