Despite recent financial turmoil and a dismal housing market, there are key reasons why the economy will continue to expand, albeit at a modest pace, and not go into recession. Businesses are well poised to absorb a period of weaker product demand and are unlikely to significantly alter their hiring and investment behavior. Consumer spending is supported by rising incomes. Exports are strong. And monetary policy is consistent with sustained growth in domestic demand. Next year, we will look back and once again marvel at the flexibility and resilience of the economy.
To be sure, there is bad news. The surge in home ownership, which rose dramatically to nearly 70% in 2005 from 64% in 1994, has proved just as unsustainable as the reliance on subprime mortgages. That surge has begun to recede, and lower prices and onerous adjustable – rate mortgage resets point toward a modest further decline.
The good news is that other factors will provide an offset. First is international trade. Strong U.S. exports and less reliance on imports, reflecting healthy economies overseas and the weaker U.S. dollar are boosting production and job creation here. Second, U.S. businesses are poised to withstand contraction. Third, Fed monetary policy points toward sustained growth in nominal spending. Despite the financial turmoil, credit remains available to basic businesses and the vast majority of households, and a general “credit crunch” is highly unlikely to unfold. Fourth, a wide array of business executives in an assortment of non-financial industries suggest that they have not materially altered their hiring plans, despite heightened concerns about general economic conditions.Once again, turmoil on Wall Street doesn’t necessarily translate to contraction on Main Street.