Don't look now: Here comes the recession

Colin Barr
CNN
Tuesday November 27, 2007

The cash registers were ringing on Black Friday, but make no mistake: American consumers are jittery, and seem all but certain to push the U.S. economy into recession.

After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector.

The latest evidence of the long-awaited consumer retrenchment: Chic discounter Target (Charts, Fortune 500) last week reported a weaker-than-expected third quarter, as sales of higher-margin apparel and home goods slowed. Starbucks (Charts, Fortune 500) reported for the first time that customer traffic in its stores declined in its latest quarter compared to a year earlier. Wal-Mart (Charts, Fortune 500) shares hit a six-year low in September after the retail giant posted another wan sales increase.

With consumer spending accounting for about three-quarters of U.S. economic activity, some economists say it is inevitable that the economy will stop growing at some point in the coming year, for the first time since the mild recession of 2001. "Right now, the question is how bad it's going to get," said David Rosenberg, chief North American economist at Merrill Lynch. "The question is one of magnitude."

Not everyone agrees. Many economists believe the Federal Reserve will steer the economy into a period of slow growth but avoid a recession, which is typically defined as two or more consecutive quarters of economic contraction. Indeed, the Fed already has twice cut its overnight interest-rate target, and options markets show investors expect the Fed to cut by another quarter-point at its Dec. 11 meeting, taking the Fed funds bank-lending rate down to 4.25%.

Government officials have steered well clear of recession talk, with recent Fed documents citing instead the risk of "an unexpectedly severe weakening in economic activity." But Rosenberg and others are skeptical of the Fed's influence on an economy staggering under a mountain of personal, corporate and government debt. The economic recovery underway in 2002 was driven by low interest rates and abundant credit availability -- helped along by then-Fed chief Alan Greenspan's decision to cut interest rates as low as 1% in 2003.

Full article here.