Average Americans and Experts Differ

I recently read an article found in Business Week entitled, "The Economy: Why So Gloomy?" The author of the article made the point that many experts of the U.S. economy and the average consumers do not see eye to eye on the current trend. Over the last three months of the year, the market has been a relative rollercoaster, with some very high days and a large amount of extreme low days. People question whether or not we will head into a recession within the next year, and the buzz has touched my interests. I have never lived through a recession that I can remember, but the idea scares me a little. The experts on the market are optimistic in the face of the declining consumer spending that has occured over the past few months. Some people feel that the consumer spending will drop from 3.6% growth from the end of last year to 2.5% growth for the remainder of 2007. This may not sound like much of a decline, but consumer spending accounts for around 70% of total G.D.P. Where is the market going? Are the experts right? Will the economy continue to grow over the next two years or are the scared consumers foretelling the inevitable future? I think that the consumers are trying to see into the future and may be right on this matter. We should probably prepare ourselves for a recession.


Hunter said...

I wrote about this article earlier in the semester and am glad for the chance to comment on it. I think this issue is very interesting because in my opinion, what the public believes will happen is what will actually happen because they will make it so. It is a self-fulfilling prophesy. I wish this were not true because I would rather believe that we are headed in a good direction but I think there are more scared people out there than there are professional trend analyzers. Basically, I think that we are headed for a decline.

Dr. Tufte said...

-1 on Hunter for a spelling error.

Currently we are in what is known as a "growth recession". That means the economy is still growing, but it is not growing fast enough (about 2% per year) to make people generally feel like things are getting better. We have been in this growth recession for 9-12 months.

Business cycles are very hard to predict, but since I am as close to an expert on this as anyone you are likely to meet, I'll stick my neck out. In my opinion, the worst of this is over, and the economy is going to rebound into the 3-4% growth range over the next several quarters. My reason for this is not a whole lot deeper than 1) these things don't last forever, and 2) it is unusual for a "growth recession" to both linger (as this one has) and to devolve into a full blown recession.

I think in 2008 we will be looking back on late 2006 and early 2007 as a "soft landing" which the business cycle expansion weathered.