Ben Bernanke and the Federal Reserve will give us their take on the economy next Tuesday and will very likely cut the federal funds rate by at least 25 basis points. The risk of recession sure seems to be higher than the risk of inflation right now. Indeed, an alternative measure of inflation—one closely watched by many Wall Street pros—that is tracked by the Federal Reserve Bank of Dallas shows that prices other than food and energy rose by just 1.8 percent in July and just 2.0 percent over the past six months. Yet there are some reasons to think that while the economy may slow through the rest of 2007, such as today's iffy retail sales report, we may yet avoid a recession. (But if there is one, here is how it might affect the 2008 presidential election.)
1. The real-time economy is still in pretty good shape. Growth for the current quarter looks to come in right around 3 percent. One reason is that our exports are booming. "Trade is functioning as an important shock absorber for the U.S. economy," explains Mike Englund of Action Economics, who is looking for 2.8 percent GDP growth in the second quarter. (Indeed, the CRB raw industrials spot price index, a measure of global economic activity, is just off its all-time high hit in July.) A recession may be on its way, but it's not here yet.
2. There are some signs of improvement in the credit crunch. Total commercial paper outstanding rose $4.1 billion for the week ending September 12. Over the previous four weeks, short-term corporate borrowing had fallen $279.1 billion, or 12.8 percent.
3. Weekly initial jobless claims rose last week to 319,000 from 315,000. That's in line with the 318,000 weekly average for all of 2007, and the four-week moving average actually edged down to 324,000 from 325,000. That level of claims is consistent with 100,000-plus monthly jobs growth, so perhaps that 4,000 drop in August payrolls was an aberration. So far at least, employers don't seem to be panicking.
4. The stock market continues to hold up despite the blizzard of bad housing and credit news. The Dow industrials are still up nearly 8 percent for the year and are down just 4 percent from the record high hit in July. Equity assets continue to be a solid offset against declines in housing assets.