Paul Krugman: "Economic Storm Signals"

Well, our crusading Krugman has returned from vacation with the news that, if your financial status is seeing red, it's not because it's the happy holiday season. Another month or two of the Bush Administration running things (into the the ninth circle of hell) and the U.S. will qualify for third world country status.

Here's a (bitter) taste; read the rest here:

“It’s tough to make predictions,” Yogi Berra is supposed to have said, “especially about the future.” Actually, his remark makes perfect sense to economists, who sometimes have trouble making predictions about the present. And this is one of those times.

We’re now two-thirds of the way through the fourth quarter of 2006, so you might think we’d already know how the quarter is going. Yet, economists’ assessments of the current state of the U.S. economy, never mind the future, are all over the place.

And here’s the bad news: this kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession (or vice versa). At turning points, the various indicators that usually tell us which way the economic wind is blowing often point in different directions, so that both optimists and pessimists can find data to support their position.

The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession. If that sounds ominous, it should: the bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year.

Before I explain what the bond market is telling us, let’s talk about why the economy may be at a turning point.

Between mid-2003 and mid-2006, economic growth in the United States was fueled mainly by a huge housing boom, which created jobs directly and made it easy for consumers to spend freely by borrowing against their rising home equity.

That housing boom has now gone bust. But the optimists and pessimists disagree both about how bad the bust will get and about how much damage the housing slump will do to the economy as a whole.

The optimists include Alan Greenspan, whom some accuse of letting the housing bubble get out of hand in the first place. On Tuesday, he told investors at a conference that the worst of the housing slump is over, saying that “it looks as though sales figures have stabilized.”

See this post for my follow-up (and yes, it's sarcastic).