New worry: A hard 'soft landing'
Everyone agrees the economy is slowing but recent reports have some analysts concerned about recession.
By Chris Isidore, senior writer

NEW YORK ( -- Economists agree: It's time to shut off electronic devices, put up tray tables and return your seat to an upright position. And some say it might not be a bad idea to put your head down between your legs.

The economy is coming in for a landing. Optimists say it will be the much sought after "soft landing" when the economy slows but doesn't skid into recession. But some economists now are forecasting a bumpy landing, or even worse.

The risk of an outright recession is rising due to the sharp slowdown in the housing market and a downturn in auto sales - two key sectors that may already be in recession themselves.

"The way I would put it, the odds of recession have risen over the past month," said Mark Zandi, chief economist for Moody's "Today I would put recession odds at 1 in 4. A month ago, it was 1 in 5. A year ago, 1 in 10."

Consumer Spending Fridays' economic news showed that spending by consumers in August rose just 0.1 percent, less than forecasts and down from a 0.8 percent rise in July. When adjusted for inflation, consumer spending actually slipped in August, an important month for retailers due to the back-to-school shopping season.

GDP Thursday's government report on gross domestic product, the broadest measure of the economy, showed growth slowed to a 2.6 percent rate in the second quarter, down from the 2.9 percent rate estimated a month ago and 5.6 percent in the first quarter.

More weakness in housing, coupled with reduced corporate profits, especially for smaller businesses, were the key reasons for the downward revision. But the lower GDP reading isn't the only sign the economy is facing tougher times ahead.

Durables Earlier in the week another report showed orders for big ticket items fell unexpectedly, with a key measure of business spending in that report showing a sharp drop. Falling business spending could spell trouble since many economists have been looking for a pickup in business outlays to counter an expected slowdown in consumer spending.

Housing Meanwhile, recent reports of home sales have shown prices for new and existing homes fell in August from a year earlier. That marked the first drop in existing home prices in more than 11 years and was the second biggest drop on record.

No. 3 builder Lennar (Charts) warned this week that the homebuilding downturn has not hit bottom, becoming the latest builder to cut its outlook. Executives at home improvement retailer Lowe's (Charts) warned during its annual analysts' meeting Tuesday that it could take as long as 12 to 18 months for the housing market to stabilize.

Automakers such as Ford Motor (Charts) and DaimlerChrysler (Charts) are cutting output due to sluggish sales of many vehicles, including pickups. Ford has decided to follow rival General Motors (Charts) and offer all of its hourly workers large payouts to retire or leave the company as it speeds up plant closing plans.

"I think it's going to be a bumpy landing, let's put it that way," said Paul Kasriel, chief economist at Northern Trust in Chicago. "GDP growth in the fourth quarter is likely to be below 2 percent, and it's not even clear it's going to be much above 2 percent in the third quarter. And very definitely, there's a risk of negative growth."

A recession is commonly defined as two straight quarters of shrinking economic output.

Kasriel is particularly concerned about the impact housing weakness will have on the economy, even outside that sector.

"Housing played a larger than normal role in the expansion," he said. "It's contributed significantly to employment growth and supporting consumer spending. With home prices falling, it means the ATM machines people had in their homes in term of their home equity won't be refilling quite as rapidly."

Kasriel noted that some factors, such as long-term interest rates now being well below the short-term rates in the bond market - the so-called inverted yield curve - are often a warning sign of a recession. That's because they can choke off cash available to businesses and consumers and put a brake on spending.

Glass half full?

But there are other economists who argue that the economy is doing just fine, even with the downturn in housing and autos.

Weakness in the housing market is not spilling over into other parts of the economy, Edward Lazear, chairman of the White House Council of Economic Advisers, testified to the Senate Budget Committee Thursday.

And even economists outside the administration agree many things point to more growth, including falling energy prices, relatively low interest rates despite two years of Federal Reserve rate hikes - and relatively strong wages.

"There's always a risk of a hard landing, but the probability is very low," said Bernard Baumohl, executive director of the New Jersey research firm The Economic Outlook Group. "Many people have not taken into consideration how stimulative the drop in gasoline prices may be. When gasoline prices fall, consumers are very conscious of that. They see the gasoline signs. That has a very beneficial effect on consumer confidence."

Baumohl said he's expecting strong holiday retail sales to be followed by a relatively quick pickup in housing as lower long-term rates and income growth boost housing demand.

He said that rather than a recession, he thinks a more likely scenario is the economy will bounce back stronger than expected and the Fed will be under pressure to raise rates by the middle of next year. That flies in the face of the financial markets, where investors are betting that the Fed may have to start cutting rates next year.

John Silvia, chief economist at Wachovia, thinks a strong-growth outlook is overly optimistic, but he also sees very limited risk of a recession or any growth rate below 2 percent in the near future. "The consumer confidence shows more stability than panic," he said. "I don't know how you define bumpy, but I don't see any kind of bumpy or hard landing."

But even Silvia admits that it's a difficult time to be making forecasts with so many cross-currents affecting the economy. "At this phase in the cycle you get a lot of conflicting pieces of information," he said.

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