Friday, June 17, 2005

The next recession

The outlines of how the next U.S. recession might happen are becoming more clear. The last recession was very business-driven from the popping of the Internet bubble, but consumer spending stayed pretty high throughout, making it a relatively mild recession. I think the opposite may occur in the next one within a few years: global growth may keep business spending and growth up, but local consumers could scale back dramatically.

Why would consumer spending drop substantially? Because their adjustable mortgages are going to start kicking in, leading to higher monthly payments and less disposable income. The New York Times has a great article on the looming real estate bubble, with a neat national map of where the biggest threats are. Fortunately, Texas looks to be in pretty good shape, but the east and west coasts are set for a big hit. Unfortunately, a national recession will definitely impact Texas, even if our own real estate market is fine.


At 1:01 PM, June 17, 2005, Anonymous Anonymous said...

The Economist features a similar article in Thursday's edition:

At 1:50 PM, June 17, 2005, Blogger Tory Gattis said...

What makes the NYT piece so scary is that home prices don't have to flatten or go down to cause a recession. Just the simple, automatic adjustable mortgage rate adjustments and the resulting boost in monthly payments could cause a recession.

There are some early data points from Australia and the UK for what this peaking looks like, but I don't know if they have access to the same dangerous mortgages that we do (interest only adjustables), so we could actually be much worse off than them.

At 2:47 PM, June 18, 2005, Blogger Owen Courrèges said...

Do you really think that having the real estate bubble burst will really cause another full-blown recession? The Times doesn't seem to think so:

"The impact is not likely to derail the economy on its own, economists predict, but it will probably slow growth."

We've shed alot of fat in the past few years; I have trouble believing that the economy will founder based on this.

At 5:31 PM, June 18, 2005, Blogger Tory Gattis said...

I honestly don't know. There was a lot of talk about the big boost to the economy when the tax cuts put a few hundred extra dollars in everybody's pocket. It seems like taking a few hundred extra out many peoples' pockets on a monthly basis would be a big impact. Pair it with another problem, and you could definitely get a recession: the rise of consumer debt (other than mortgages), oil price spike, tax increases to cover entitlements, trade war or protectionism.

At 3:27 AM, October 25, 2008, Blogger Davey Jones said...

LOL, guess you all got it wrong :)

At 8:01 AM, October 25, 2008, Blogger Tory Gattis said...

Got the consumer part right, but the global biz part wrong. I didn't realize how much a U.S. housing collapse would impact the whole world. When it happened to Japan in the 90s, it stayed there. But mortgage securitization spread the U.S. pain around the world with those bonds.


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