Intimations of Recession

Paul Krugman takes the recession-worrier side of the argument:

Intimations of Recession - New York Times: By PAUL KRUGMAN: The key point is that the forces that caused a recession five years ago never went away. Business spending hasn't really recovered from the slump it went into after the technology bubble burst: nonresidential investment as a share of G.D.P., though up a bit from its low point, is still far below its levels in the late 1990s.... [T]he economy grew fairly fast over the last three years, mainly thanks to a gigantic housing boom... unprecedented spending on home construction... allowed consumers to convert rising home values into cash through mortgage refinancing, so that consumer spending could run far ahead of families' incomes....

Even optimists generally concede that the housing boom must eventually end, and that consumers will eventually have to start saving again. But the conventional wisdom was... that... business investment and exports would stand up as housing stood down. The latest numbers suggest, however, that this theory isn't working.... Signs of a deflating housing bubble began appearing a year ago... the latest G.D.P. data show real residential investment falling at an accelerating pace. The latest job numbers show falling employment in home construction, and retail employment has fallen over the past year, suggesting that consumer spending is running out of steam....

Meanwhile, neither business investment nor exports seem to be growing fast enough to make up for the housing slump.

Now maybe we'll still manage that soft landing despite a rapidly rising number of unsold houses.... But based on what we know now, there's an economic slowdown coming.... And what will policy makers do about a slump, if it happens? A snarky but accurate description of monetary policy over the past five years is that the Federal Reserve successfully replaced the technology bubble with a housing bubble. But where will the Fed find another bubble?

And with the budget still deep in deficit and the costs of the Iraq war still spiraling upward, it's hard to see Congress agreeing on any significant fiscal stimulus package.... One last thing: the real wages of most workers fell during the "Bush boom" of the last three years. If that boom, such as it was, is already over, workers have every right to ask, "Is that it?"