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Potential For Decline

By wmadministrator

After Ed Lane called to ask that
I contribute a piece to The Lane Report on the economic outlook
for 2008, I tried to remember where I had last seen my old crystal ball.
I finally found it in the grandchildren’s toy box, smudged but missing only a few small chips.
I wiped it off and made a few passes over it with my now-arthritic hands while I began to incant my favorite seer’s mantra: “If you must forecast, forecast frequently.”

It took a while for the old ball to warm up and yield a vision. Not to mince words, it was an apparition: three shadowy, hooded figures in a cave tending a big pot on an open fire. The first shadowy figure, stirring the pot, was chanting, “Boil and bubble, oil’s the trouble.” The second, waving a black hat emblazoned “Beware the Euro,” was singing, “Thunder and rumble, see the dollar tumble.” The third was pushing large bundles of paper into the fire while cackling, “Burn bright, mortgage blight.”

The import of this dark tableau is clear enough. The U.S. economy in 2008 will continue to be assailed by high oil prices, a falling dollar and further mortgage foreclosures and declines in home prices. Will the U.S. economy be able to continue to take such punishment without falling into recession or worse?
There is certainly much potential for serious economic decline.

High oil prices will make for “cost-push inflation” in energy-dependent activities. The strongest inflationary pressure will likely be on food prices, which will reflect not only high oil prices but also high ethanol-related prices for corn. Such energy-related inflation will, however, draw consumer spending away from other sectors, thereby curbing price increases in those sectors.

The weaker dollar is making imports more costly for U. S. consumers, thereby adding to “cost-push inflation.” At the same time, though, foreigners are finding it more attractive to purchase U. S. exports and dollar-denominated assets.

The scariest threat is posed by the housing and mortgage problems because it is impossible to predict how much worse the problems may become in 2008.

Our best hope is to trust to the U.S. economy’s basic strength and diversity, as the economy has shown again and again that it can take a lot of punishment and keep on ticking. Also, having good luck on our side in 2008 is much to be desired.