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Many economists aren’t predicting a recession

Alan Greenspan and the Wall Street nosedive aside, economists think the probability of a U.S. recession this year is fairly low and the likelihood of one in China is even slimmer.
/ Source: The Associated Press

Alan Greenspan and the Wall Street nosedive aside, economists think the probability of a U.S. recession this year is fairly low and the likelihood of one in China is even slimmer.

Greenspan, the former chairman of the Federal Reserve, warned this week that the world's largest economy — the United States — could slip into recession this year. That would be bad news for the global economy, too.

However, many economists put the probability of a recession at about one in five.

The biggest risk to the five-year-old U.S. economic expansion is that the housing slump might take an unexpected turn for the worse, analysts say. In one dire scenario, not only would consumers and businesses clamp down on spending and investing, but troubles could spread to lenders dealing in risky mortgages, triggering a financial crisis.

The latest U.S. economic barometers released Tuesday were mostly good, but they failed to ease investors' anxiety. The Dow Jones Industrials tumbled 416.02 points to close at 12,216.24. At one point during the day, the Dow slid as much as 546 points, its worst decline in more than five years.

The National Association of Realtors reported that sales of previously owned homes — the biggest chunk of the housing market — rose by 3 percent in January from the previous month. That was the largest gain in two years. While the sales boost was helped out by last month's unusually warm weather, it still raised hopes that the worst of the residential real-estate bust may be over.

Even if that turns out to be the case, the pain of the housing slump will continue to be felt this year because the inventory of unsold homes is still bloated. That will take time to fix and may drag down home prices even more.

The nationwide median price of an existing home sold in January sank to $210,600, a drop of 3.1 percent from last year and the third-largest annual decline on record. The median price is where half sell for more and half for less.

So far, consumers — the lifeblood of the economy — have been spending sufficiently to keep the economy moving ahead. The worry, though, is that people who had treated their homes like ATMs — when values were soaring through the five-year housing boom that ended in 2005 — will cut back on their spending as home prices in some markets drop or go up only a little.

Before Tuesday's huge stock market drop, consumers seemed in buoyant spirits.

Consumer confidence zoomed to a 5 1/2-year high in February with people feeling better about current economic conditions as well as the jobs climate. The Conference Board's index climbed to 112.5 from 110.2 in January. That should bode well for the national economy because if consumers are feeling optimistic they may be more inclined to spend.

A third report, also released Tuesday, underscored the struggles of the nation's manufacturers, who have been feeling the strain from the ailing housing and automotive sectors as well as intense foreign competition. Orders for big-ticket manufactured goods plunged 7.8 percent in January, the largest decline since October, the Commerce Department said.

Economic growth for the final quarter of 2006 is expected to be downgraded on Wednesday to a subpar 2.3 percent pace from the solid 3.5 percent rate initially estimated a month ago.

Gross domestic product measures the value of all goods and services produced in the United States and is the best barometer of the nation's economic fitness.

For all of this year, the National Association for Business Economics, or NABE, is predicting the economy to slow to 2.8 percent, down from 3.4 percent in 2006. The Bush administration thinks growth will slow to 2.9 percent, while the Federal Reserve estimates somewhere between 2.5 percent and 3 percent. The housing slump is expected to be the main culprit. Next year, though, economic growth would pick up to the 3 percent range.

The International Monetary Fund, in projections last fall, said the world economy should hold up well in the face of a slowing U.S. economy and should grow by a solid 4.9 percent this year.

China's economy logged blistering growth of 10.7 percent last year — the most since 1995. It is expected to slow somewhat to 9.8 percent this year, according to the country's central bank.

Brian Bethune, economist at Global Insight, predicted China's growth would have to slow much more — to around 6 percent or less — to precipitate major economic turmoil. "It would take a major slowdown to upset the Chinese applecart," he said.

Economists put the odds of a U.S recession this year at about one in five. "It is very rare that business cycles die of old age. It is usually some shock that leads to recession," said Carl Tannenbaum, chief economist at LaSalle Bank and president of the NABE.

The economy's last recession in 2001 was preceded by the bursting of a stock market bubble in 2000 that wiped out trillions of dollars in paper wealth. Then came the 2001 terror attacks. The shock this time could come from the housing slump and from the surge in delinquencies and foreclosures for "subprime" borrowers — people with weaker credit records who are considered higher risks — especially those who have adjustable-rate mortgages.

"While the probability of a recession is low, it does highlight that the economy will be vulnerable to any shock in 2007. It is worth thinking about and preparing for," said Mark Zandi, chief economist at Moody's