Krugman Sees 30-40% Chance of U.S. Recession in 2010 (Update2)
By Steve Matthews
Jan. 4 (Bloomberg) -- Nobel Prize-winning economist Paul Krugman said he sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.
“It is not a low probability event, 30 to 40 percent chance,” Krugman said today in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”
Krugman, 56, said growth will slow as the Federal Reserve ends purchases of securities, the Obama administration’s $787 billion stimulus program winds down and companies stop rebuilding depleted stockpiles.
The Princeton University professor joined Harvard’s Martin Feldstein and Columbia’s Joseph Stiglitz, another Nobel laureate, in sounding an alarm for the world’s largest economy during the annual meeting of the American Economic Association. Feldstein yesterday called the fading stimulus “a serious cloud,” and Stiglitz said growth won’t be “robust” soon.
While inventory rebuilding may have raised U.S. growth to a more than 4 percent annual pace in the fourth quarter, this year’s rate will be “more like 2 percent,” with the risk of outright declines late in the year, Krugman said. Unemployment “ends the year a little higher than it began,” Krugman said.
Survey of Economists
Krugman’s forecast is more pessimistic than the median estimate of 58 economists surveyed by Bloomberg News in early December, which called for a 2.6 percent expansion this year following a 2.5 percent contraction in 2009.
The Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and about $175 billion of federal agency debt in March could spur an increase in mortgage rates and lead to declines in home sales and prices, Krugman said.
“Probably mortgage rates go up some,” he said. “New home sales are still pretty weak and new home construction is a joke by the standards of a few years ago. But they probably falter.”
The Fed should consider buying another $2 trillion in assets to reduce unemployment, Krugman said, citing research by Joseph Gagnon, a former Fed staff economist.
Fed Chairman Ben S. Bernanke and his fellow policy makers cut the benchmark interest rate almost to zero in December 2008 while switching to asset purchases and credit programs as the main policy tools. The central bank has expanded its balance sheet to $2.24 trillion from $858 billion at the start of 2007.
Manufacturing Expands
U.S. manufacturing expanded in December at the fastest pace in more than three years, aided by government-assisted rebounds in housing and auto-making, a report today from the Institute of Supply Management indicated.
The ISM’s factory index rose to 55.9, the highest level since April 2006. Readings greater than 50 signal expansion. Construction spending dropped for a seventh month, the Commerce Department said in a separate release today.
“Stimulus we know starts fading and goes negative around the middle of the year,” Krugman said. “Inventory bounce, which is driving things right now, will fade out as inventory bounces do.”
Any sales by the Fed of mortgage-backed securities as part of a so-called “exit strategy” from record stimulus could increase mortgage rates by 1 percentage point and impede the recovery, Krugman said.
The rate for 30-year fixed U.S. home loans rose to 5.14 percent in the week ended Dec. 31, the fourth straight weekly increase and highest level since August, according to mortgage finance company Freddie Mac.
Stock Rebound
Krugman said he disagreed with former Fed Chairman Alan Greenspan’s view that the surge in stock prices last year reduces the need for additional government stimulus. The Standard & Poor’s 500 Index rallied 23 percent in 2009, its best performance since 2003.
“People are a lot poorer than they were four years ago,” Krugman said. “Consumption is not that dependent on stock values, much more so on housing values.”
Advanced economies in Europe and Asia also face the risk of a renewed recession, Krugman said.
“The double dip issue is present everywhere in the advanced world,” he said. “We all have stimulus programs that kind of fade out.”
The U.S. dollar may weaken “a little bit” against other advanced country currencies, he said.
‘Extended Period’
At its last meeting in December, the central bank’s Federal Open Market Committee said economic activity had picked up, while affirming a pledge to keep the target interest rate exceptionally low for an “extended period.”
“Historically, financial crises are very, very prolonged,” Krugman said. While the U.S. banking system has “stabilized,” it hasn’t returned to normal, he said.
“Small business is still very constrained in its borrowing,” he said. “That is not a good thing. We do not have a fully healthy, functional financial system.”
The economy expanded at a 2.2 percent annual rate in the third quarter. The nation’s jobless rate stood at 10 percent in November, up from 9.8 percent in September. The rate will probably rise to 10.1 percent in December, according to the median estimate in a Bloomberg News survey of economists ahead of the Labor Department’s report on Jan. 8.
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;
Last Updated: January 4, 2010 14:59 EST |
