Con: Expanding global economy will keep U.S. economy humming
As the U.S. economy enters its seventh year of economic expansion, many are predicting that a recession is looming on the horizon in 2008.
Donít believe it! The U.S. economy is strong, healthy and stable, and it will continue on its expansionary path well into the new year.
The National Bureau of Economic Research, the nationís leading authority on business cycles, closely watches five economic variables to determine when the economy officially goes into a recession. You might be surprised, but the NBER doesnít look at any of the economic variables that get all of the attention in the media, like the subprime crisis, the falling dollar, foreclosures, the stock market and rising oil prices.
The only five variables that really matter for determining when a recession starts are payroll employment, production measured by real Gross Domestic Product and industrial production, real personal income, and real sales activity.
Despite all of the economic gloom and doom youíve heard on the news, not a single one of these variables has started to show any signs of economic weakness. Itís actually just the oppositeóall five of these economic variables are showing continuing economic strength and vitality!
For example, payroll employment is at a record level and has increased in each of the last 51 months, the longest continuous period of job growth in U.S. history. Industrial production has increased in each month since June 2003, and reached a nine-month high in November. Real GDP grew almost 5 percent in the third quarter of 2007, the strongest growth in four years, and we can expect growth of 2.5 percent during the fourth quarter.
Record retail sales and consumer spending through November suggest that American consumers remain upbeat and optimistic, and real compensation growth for U.S. workers in the third quarter of 2007 was the highest in seven years. In other words, all of the key economic recession indicators suggest a very healthy economy at year end, not an economy on the edge of falling into recession in 2008.
To be sure, there are challenges ahead for the economy, but even the problems facing the U.S. economy will not be serious enough to cause a recession in 2008. The biggest threats are the subprime mortgage crisis and rising home foreclosures, but the resilient U.S. economy can easily absorb that kind of shock to the financial sector.
Remember the S&L crisis of the mid-1980s, which caused almost 1,500 banks to fail? Even that banking meltdown didnít cause a recession, and the economy and banking system are both much stronger and more stable today. In fact, never in U.S. history has the U.S. banking system been more stable. Only three banks have failed during the last three years out of a total of 8,500, an unparalleled record of banking stability.
If the economy of the late 1980s could handle a major banking crisis without going into recession, the bigger, stronger Goldilocks economy of today can easily handle the subprime mortgage crisis and a weak real estate market.
Just the enormous size of the U.S. economy ($14 trillion), diversified across a large number of industries and an enormous geographical area, provides a high degree of economic stability and will insulate the economy against recessionary pressures. A $14 trillion economy can take a lot of shots and remain standing, and itíll take more than a subprime mortgage crisis and housing troubles to knock Goldilocks down.
Even in the unlikely event of a 2008 recession, the U.S. economy will continue to survive and prosper. Make a new yearís resolution to give the U.S. economy a little more credit, appreciation and respect this year. Recession or not, itís still the greatest wealth-generating, prosperity-producing, job-creating economy in the history of the world.
Mark J. Perry is a professor of finance and economics at the Flint campus of the University of Michigan. Readers can write to him at UM-Flint, 4173 WSW Building, Flint, MI 48502-1950; e-mail: email@example.com.