“While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts.
”The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''
Additionally, economists at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are among those lowering economic forecasts as increasing credit costs exacerbates the worst housing recession in 16 years. What’s more, consumer spending and jobs now no longer appear immune to the fallout.
A significant dip in consumer and business confidence has felt the effects of the financial turmoil in the last couple of months, according to surveys taken in August. Wal-Mart Stores Inc., the world's largest retailer, lowered its earnings forecast for this year. Financial-services companies including Atlanta-based SunTrust Banks Inc. announced plans to eliminate thousands of jobs.
Though reports show a strong start to this year's third quarter, economists will be watching this week for U.S. auto sales and August employment to see whether spending and the job market might follow housing into a slump, according to an article in Bloomberg.
“We're taking the pulse of the economy a little more frequently,'' says Jonathan Basile, an economist at Credit Suisse Holdings in New York. “If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets.''
Consumers are also they are less confident and are uncomfortable with regard to what is occurring in the financial markets. According to the Conference Board, a private research group in New York, U.S. consumer confidence tumbled last month by the most since Hurricane Katrina struck two years ago.
“I think there's a significant risk of recession now,'' says Martin Feldstein, president of the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end. “The consumer will be spending less. The most recent consumer confidence numbers are down. That's going to be reinforced by everything happening in the housing market.''