A TEST OF RESILIENCE
Financial Crises Have Slowed But Not Halted U.S. Economy
Tuesday, September 16, 2008
Even as the meltdown of the housing and mortgage markets has deflated home values, touched off a rush of foreclosures, triggered a federal bailout of the mortgage giants Fannie Mae and Freddie Mac, and resulted in a massive restructuring on Wall Street, the larger economy has muddled on.
Since the housing problems began to boil over last year, the economy has continued to expand. Boosted by federal stimulus payments, the country's gross domestic product grew at a 3.3 percent annual pace in the second quarter of this year, making up for anemic growth the quarter beforehand.
There are some signs, including a rapidly rising unemployment rate, that the economy is now entering a darker phase. But many analysts call the growth so far this year -- halting and tepid as it may be -- evidence of the strength and resilience of the U.S. economy, which they say has evolved in ways that so far have allowed it to absorb the shocks to the housing and financial sectors.
The weakened U.S. dollar, for instance, has fueled a sharp increase in exports. Rising prices for commodities, from soybeans to natural gas, have contributed to upswings in agriculture and mining.
Sen. John McCain (R-Ariz.) yesterday declared that "the fundamentals of our economy are strong," a remark that drew the ridicule of his opponent in the presidential race, Sen. Barack Obama (D-Ill.). For economists, the strength of the fundamentals depends on how the term is defined. Some of the latest short-term indicators of economic health -- job growth and retail sales -- are bleak. But in the long term, the American economy still functions as it should, and the United States remains the global economic powerhouse.
"We are in a weakened but not weak state," said J.D. Foster, a senior fellow at the Heritage Foundation and a former associate director of the Office of Management and Budget under President Bush. "There are other strengths in the economy that have allowed us to offset weaknesses in housing and the financial markets."
Technology and globalization have also allowed businesses to operate with fewer people and boost productivity, some economists said. While those efficiencies have squeezed wages and slowed job creation, they also have led to generally healthy corporate balance sheets, helping the economy withstand market turbulence.
"The reason that all the turmoil on Wall Street hasn't mattered more is that lending has continued to go on and corporations come into this in generally good shape," said Edward E. Leamer, an economist at the University of California at Los Angeles. Leamer said the mortgage and credit crises, while devastating some households, have yet to directly affect the spending habits of most Americans, even though the value of their homes and investment portfolios has dropped.
That's not to say Americans are pleased with the state of the economy. About 86 percent said the national economy was in "not good" or "poor" shape in an ABC News poll last week.
Many economists, meanwhile, said the worst was yet to come. Leamer said there were already signs of a shift, including a slowdown in automobile sales. But rather than approaching a sharp drop, he said, the economy is most likely to be in for a prolonged period of sluggish growth.
Yesterday, the Federal Reserve reported that industrial production was down sharply in August. The Fed also said it was lowering its previous estimates of industrial production in June and July. Unemployment stands at 6.1 percent -- relatively low by historical standards but the highest level in five years. In the past year, the number of unemployed people has increased by more than 2 million.
"The outlook is for even worse performance," said Andrew F. Brimmer, an economist and a former Fed governor. "All of the weaknesses are not showing through yet."
Christian E. Weller, a senior fellow at the Center for American Progress and a professor at the University of Massachusetts at Boston, said things were bad, even if they do not yet look that way. With spiraling debt and a yawning trade deficit, and with many consumers grappling with burdensome mortgages and credit card bills, he said, the country is in for a long repayment period.
"Just because this isn't the Great Depression, it doesn't mean we will be fine. We have sold the family silver, and we continue to do that," Weller said. "The way it looks, we'll avoid the worst scenarios. But with all that debt, we look like we're sliding into years and years of slow economic growth."