An Economy's Mixed Message on Suffering

By Neil Irwin
Washington Post Staff Writer
Thursday, January 17, 2008

A wide range of data from the government, private corporations and independent analysts paint a picture of a nation that is already in recession in some states and industries, while much of the nation and big parts of the economy have suffered little.

It is a divided economy, in which major Wall Street banks are recording multibillion-dollar write-downs even as most regional banks have endured little damage. While unemployment is rising and consumers are falling behind on their bills in such highly populated states as Florida, California and Michigan, most other states appear to be doing fine. Construction workers are on unemployment lines, but engineering and consulting firms are in bidding wars for staff members.

This divide, reflected in a report released yesterday by the Federal Reserve, shows a nation struggling to fight off the housing and credit crisis. The challenge facing policymakers is to prevent the problems from spreading without unnecessarily increasing the budget deficit or stoking inflation.

"We don't have a full-blown nationwide recession now, or even a full-blown slowdown," said Joel Naroff, chief economist of Commerce Bank. "But that doesn't mean it doesn't ultimately turn into one. What the Fed and Congress need to do is try to make sure this is a soft period rather than a recession."

The Fed's "beige book," a compilation of anecdotal reports of business conditions around the country, speaks of "robust demand" in industries such as health care, hotels, insurance and the legal sector. The agricultural sector is enjoying good times as corn prices rise. The beige book said, however, that recent holiday sales were disappointing in much of the country and that manufacturing activity was mixed.

The economic damage appears to be concentrated in hotbeds of the mortgage crisis, states that also include Arizona and Ohio. In June, Nevada had the same unemployment rate as the country as whole, 4.6 percent. By November, joblessness had risen to 5.4 percent in Nevada, another of those heavily affected by the housing crunch. Nationally, the November unemployment rate rose to 4.7 percent.

By sector, economists said, the damage is worst in the construction, manufacturing, and housing-related portions of the financial services industry. The Fed reported yesterday that industrial production was flat in December.

Citigroup, for example, said this week that it had to write down losses from bad credit card debt, auto loans and home-equity loans. American Express and Capital One reported a similarly negative prognosis for consumer credit earlier in the month. The firms all indicated the damage was concentrated in those states most affected by the housing downturn.

"So far the economic damage has been concentrated in housing and housing-related activities," said Mark Zandi, chief executive of Moody's "Where housing is crashing is where economies are contracting."

Prices for food and energy have been rising rapidly, underscored by fresh data from the Labor Department yesterday that consumer prices rose 0.3 percent in December.

The consumer price index rose 4.1 percent for all of 2007, compared with a 2.5 percent increase in 2006. Energy prices, responding to a surge in the cost of oil, rose 17.4 percent last year. The price of food increased 4.9 percent, the largest rise in 18 years.

In this bifurcated economic landscape, the sectors that are suffering are slowing the nation's overall growth rate. Job growth was weak in December -- 18,000 jobs, as private employers shed positions. If construction, manufacturing and credit-intermediation employment had been flat, however, the nation would have gained 105,000 jobs.

Much of the discussion over the economy in recent weeks has focused on the possibility that the United States will experience a recession this year. That is ultimately a technical designation that a panel of economists will decide years from now. What really matters is how widely the pain from the crisis in housing and financial markets spreads.

Some economists see tentative, worrying signs that the damage is spreading to states and industries now unaffected.

"You get the sense that things are starting to slow in other places," Zandi said. "Airlines are complaining about travel, retailers are on high alert. In areas that are affected by the problems on Wall Street, you are starting to see the effect in legal services, accounting, advertising, catering."

If those signs turn into broad weaknesses, it would mirror the late 1980s, when there were "rolling recessions," in which one region or industry after another suffered from weak economic conditions. "The economy never went into recession, but different sectors did, with different regions hit at different times," said Naroff, who also is president of Naroff Economic Advisors. "It is not unusual at all."

"At this point, I think the preponderance of probability is on a U.S. recession this year, and there is the possibility, though not yet at all the probability, that a recession could prove long and severe if a vicious cycle of credit problems cause economic problems, cause further credit problems, exacerbate the economic problems," Lawrence Summers, the former Treasury secretary, said in testimony before the Joint Economic Committee yesterday.

But other economists predict the pain will be largely confined to Wall Street mavens, over-extended homeowners who took on loans they could not afford, construction workers and real estate brokers.

Momentum has been building in Congress for a fiscal stimulus package.

Fed Chairman Ben S. Bernanke has told congressional leaders that he thinks a stimulus plan could make sense, though he seeks to avoid endorsing a specific plan. Bernanke is to testify today before the House Budget Committee and will probably try to deflect questions seeking his view on specific tax and spending bills, as is his practice.

In the hearing yesterday, Sen. Charles E. Schumer (D-N.Y.) said Bernanke "said that while he wasn't going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it enters the economy quickly, it could have a very positive effect on the economy."

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