Wessel: Housing, Oil Woes Make Recession Likely The combination of a troubled housing market, rising oil prices and credit problems stemming from the subprime lending crisis is likely to lead the economy to recession, says David Wessel, economics editor for The Wall Street Journal.
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Wessel: Housing, Oil Woes Make Recession Likely

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Wessel: Housing, Oil Woes Make Recession Likely

Wessel: Housing, Oil Woes Make Recession Likely

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RENEE MONTAGNE, Host:

Good morning.

DAVID WESSEL: Good morning.

MONTAGNE: So the word you're now using, David, is recession. In your latest column you, yourself, said though that forecasters are rarely right. So what's behind your prediction?

WESSEL: Well, it seems to me there are three things going wrong at the economy at the same time. One is housing is worse than we anticipated. Second is oil prices are higher and going higher. And the third is that one after effect of this subprime debacle is the tightening of credit conditions across the economy. They'll make it harder for consumers and businesses to borrow. I just don't think the resilient U.S. economy can withstand that, and I expect we're going to have a recession.

MONTAGNE: Well, we've been hearing about all three of those things variously for the last several months. Why do so many forecasters believe that the U.S. will avoid a recession in spite of all of that?

WESSEL: The more optimistic people say that exports will bail us out of this. The dollar is weak and that makes our exports more attractive to foreigners. And foreign economies - China, Europe - are pretty strong, so that gives us a ready market. And secondly, as long as the job market holds up, people will have money to spend and they'll keep spending. I think those things are both true. I just don't think they're strong-enough forces to offset the downsides of housing, oil prices and a credit crunch.

MONTAGNE: Now, there have been other big housing busts. Why has this particular one seemed to have such a long reach?

WESSEL: Well, this is pretty unusual. We haven't in the past seen such a steep rise in housing prices that created so much wealth and so much ability to spend and so much headiness among lenders, then followed by such an abrupt decline. So it's not that we haven't seen housing booms and busts before, we just haven't seen one of this magnitude. And I think the widespread reach of housing throughout the economy and the fact that housing we thought was stabilizing in the spring but turned out isn't stabilizing, is one of the things that changed my mind about the likely outcome.

MONTAGNE: David, we know things aren't going well, as you've just said, in the economy, housing prices are falling, the various things you've listed - oil, gas prices rising, stock markets unpredictable. If we go in to a recession, what difference will that make to most people?

WESSEL: Well, it means more people suffer - fewer people get jobs, fewer people get wage increases, more kids who graduate from college find the employment door shut to them. It doesn't mean we're going to have people starving in the streets. My guess - and it is a guess - is that we'll have a short and shallow recession that the Federal Reserve will cut interest rates enough to prevent it from being a really deep one, but a little more misery for a few more people is a bad thing.

MONTAGNE: Well, the Federal Reserve meets tomorrow. Is the second rate cut likely, and if it is, as a matter of fact, will it improve anything?

WESSEL: It's too late for the Fed to do anything about the economy in the next few months. It takes a while for interest rate cuts to work their way through the system. I genuinely don't know what the Fed is going to do, and they've been a little confusing in their signals. There is a good case for cutting rates. And if Fed Chairman Ben Bernanke agrees with my recession forecast, I'll bet he's going to reduce interest rates. But I don't know that he does, and there are some people at the Fed who think they did quite a bit already, and they should wait and see if the economy heals itself.

MONTAGNE: David, thanks very much.

WESSEL: A pleasure.

MONTAGNE: David Wessel is our in-house forecaster and economics editor of the Wall Street Journal.

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