5 Doomsday Scenarios for the U.S. Economy
Posted by John Malloy on 09/02/2010
By Derek Thompson and Daniel Indiviglio
It’s been a brutal summer for the economy. The housing sector, like a balloon batted in the air one last time by the government credit, resumed its inevitable fall. Economic growth slowed to a lead-footed 1.6 percent, and job growth is even more anemic. Meanwhile, consumers are cranky, the trade gap is gaping.
Most signs point to a slow and steady recovery, but what if the pessimists are right, again? What if the United States isn’t in the slow-lane to recovery, but rather on the precipice of another decline — a double dip?
To see where this re-recession might begin, my colleague Dan Indiviglio and I imagined five financial earthquakes, each with a single epicenter: housing, consumers, toxic assets, Europe, and the debt. The following five scenarios are listed in order of likelihood.
1. Housing’s Mini-Bubble Pops
Perhaps nothing poses as a big of a concern to the U.S. economy as its housing market. It’s unclear how the government’s efforts to stabilize the market through a buyer credit, ultra-low mortgage rates, and mortgage modification programs will pan out. Did it just create another mini-bubble that’s beginning to pop now that the support has been withdrawn?
Here’s the scenario. Weak home sales and continuing foreclosures result in climbing real estate inventory. This has two effects. First, it makes new homes even less attractive which furtherreduces construction jobs. Second, it puts downward pressure on home prices, which makes it harder for struggling homeowners to sell their home to avoid foreclosure and also keeps strategic default rates high, exacerbating the problem. Lower home values encourage Americans to save more and spend less, since their wealth is effectively reduced. The Dow drops and credit markets tighten even further, suffocating private investment just as homeowners bunker down and slash spending. Growth turns negative.
via 5 Doomsday Scenarios for the U.S. Economy – Business – The Atlantic.
Posted by
John Malloy
on 09/02/2010. Filed under
International.
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