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Wharton, the University famed for its finance programs, has an online offshoot called Knowledge@Wharton where various articles often penned by its professors about business and the economy can be found. On November 14, 2007, five well-known professors weighed in about their respective insights about what’s ahead for the U.S. Economy.
The professors were asked to make sense of a market in tumult, sometimes looking good (GDP growth, full employment) and sometimes looking bad (stock market and dollar falling, real estate and mortgage market decay). In this posting, I summarize the pearls of their wisdom, the luster of which can more fully be appreciated in this article.
Jeremy Siegel. He expects the U.S. economy to slow down by summer, but marks the chance of recession of only 25% over the next year. “I am more worried about gasoline spiking up to $4 a gallon and beyond than I am about the subprime crisis.”
Richard J. Herring. There’s a balance between the falling dollar making some vital goods more expensive for Americans, like fuel, and the boon it is to the balance of payments from a trade perspective. The dollar is unlikely to fall much further due to China dumping it, as this would reduce the value of China’s dollar holdings and reduce their exports to the U.S. The real worry is consumer spending, the key to the economy, so look to what happens in retail come December.
Gregory Nini. This former Fed economist has fewer concerns now than last summer, as back then corporations had difficulty borrowing to help fuel their growth, a situation that is better now. “The big question now is how the job market will play out, and in particular, how it feeds into consumer spending.” Although he recognizes that concern about the dollar influences the Fed, he thinks that financial markets don’t view inflation as a threat and recognizes, like Herring, that if China dumped dollars, it would be punishing to China itself.
Richard Marston. He’s more pessimistic and believes that recession is a threat given that the subprime mortgage impact is hard to gauge. Echoing the sentiments of Nini, he says if businesses can not reasonably borrowing money, the economy could seriously weaken. “Whether we hit a recession depends on one of two things happening. Either the banks get into enough trouble that they engineer a credit crunch on regular bank lending, which hits the medium and small firms in this country, or the consumer starts to blink. We are weak enough now that either thing could push us into recession.”
Marshall E. Blume. The collapse in the subprime markets “was a wakeup call that things were priced too high across the whole spectrum.” High-yield corporate bonds carried yields too close to those of investment-grade bonds suggesting that investors were underestimating the risk. More Wall Street firms will have losses, and when combined with tight credit, this can weaken the economy… “I think we’re basically coming from a bubble economy to a more realistic economy. And whenever you do that, things are painful.”
Again, to get the full flavor of the article I summarize, read it here.