The 2007 Economy in Review

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2007 was a year when oil prices soared, home sales plunged and the U.S. dollar took a dive. But it was also a year when the U.S. economy performed well — at least until the last quarter — and the stock markets' major indexes are set to finish the year higher.


This is MORNING EDITION from NPR News. I'm Renee Montagne.

If you're trying to sell a house in southern Florida or you work for a mortgage company or if you just drive a lot, 2007 was probably a year you'd like to forget. It was a year when oil prices soared, home sales plunged and the dollar took a dive. But it was also a year when the U.S. economy grew nicely, at least until this very last quarter, and stock prices are set to finish the year higher.

NPR's Jim Zarroli looks back at the year's economic news.

JIM ZARROLI: If you are looking for a single emblematic moment in the economy this year, an event that people might remember years from now when they look back on the turmoil of 2007, there were plenty of candidates.

There was the conference call last summer when Angelo Mozilo, chairman of the mortgage giant Countrywide Financial, had to explain to nervous shareholders just how bad the business climate had gotten.

Mr. ANGELO MOZILO (CEO, Countrywide Financial): As I try to walk through what happened here, and could a lot of this have been foreseen, and should we have known, could we have seen it? But as I do reflect on it, and I do a lot, that nobody saw this coming.

ZARROLI: Or maybe it was that embarrassing moment when the U.S. dollar, battered by the mortgage fallout, became less valuable than the Canadian dollar, also known as the loonie, for the first time in decades. And the United States started to look like one big discount store for foreign tourists.

Or perhaps it was that October morning when Merrill Lynch CEO, Stan O'Neal, days before losing his job, had to tell analysts that the company's subprime losses were $3 billion higher than he first thought.

Mr. STAN O'NEAL (Former CEO, Merrill Lynch): I'm not going to talk around the fact that there were some mistakes that were made. We - I - am accountable for those mistakes, just as I am accountable for the performance of the firm overall.

ZARROLI: 2007 was the year when investors everywhere woke up to the fact that the U.S. home foreclosure rate had gotten disturbingly high and that those mortgage-backed securities weren't such a great investment; that is, if you wanted to make money.

Even worse, some of the titans of Wall Street, like Citigroup's Charles Prince, seemed to be in the dark about the extent of their firm's subprime investments. Sam Stovall, the chief investment strategist at Standard and Poor's, says that made a lot of investors nervous.

Mr. SAM STOVALL (Standard and Poor's): When we find out that Stanley O'Neal or that Chuck Prince didn't even know how much was in their own companies, those people outside of those companies certainly do not have a better feel.

ZARROLI: Suddenly what had been a source of pride, the rising U.S. rate of home ownership, came to seem like an indiscretion, and lenders who once gave money to anyone with a bank account had to start examining borrowers' credit records again.

2007 saw a big tightening of lending standards for consumers and businesses. Economist Rich Yamarone of Argus Research.

Mr. RICHARD YAMARONE (Argus Research Corporation): What we have now is a crisis of confidence that borrowers and lenders do not want to lend to each other because they don't know what they have on their balance sheets.

ZARROLI: Yamarone says that's a potential problem because if companies can't borrow, business activity grinds to a halt. But Yamarone says the remarkable thing is that with all of these problems, the U.S. economy has still fared pretty well this year. The economy grew by a healthy 4.9 percent between July and October. The stock market has largely recovered, thanks in no small part to the Federal Reserve's decision to cut interest rates four times, and it will end the year in positive territory. Unemployment is still low, and Yamarone says even consumers are still spending.

Mr. YAMARONE: The R-word that we should be thinking of here is not recession, it's resiliency. And everyone seems to forget about how strong and resilient the American consumer is.

ZARROLI: Not all economists are so optimistic, and there is a pretty widespread consensus that a sharp slowdown has begun. Will that slowdown lead to a full-blown recession?

Sam Stovall of Standard and Poor's has his own way of answering that question.

Mr. STOVALL: Actually, if you wanted to think of a good way of remembering the five things that are likely to affect the markets going into 2008, it's the "Old MacDonald" song of E-I-E-I-O.

ZARROLI: That's employment, inflation, earnings, interest rates, and oil. In other words, Stovall says, if corporate earnings fall, or if joblessness, interest rates, energy costs or prices rise, the odds of a recession will increase. He still doesn't think a recession is likely. But if a recession is in the pipeline, one thing is clear; it will have its roots in the turmoil that hit the mortgage market this year.

Jim Zarroli, NPR News, New York.

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