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Summit News

NBER chief: U.S. slipping into recession

NEW YORK (Reuters) - The U.S. economy likely peaked in December or January and is now slipping into a recession, the head of the influential National Bureau of Economic Research said on Wednesday.

“I think we’re heading for a recession,” Martin Feldstein said at the Reuters Investment Outlook Summit in New York. He stressed that he was speaking from his personal opinion, not that of the NBER, the unofficial arbiter of U.S. recessions.

“My sense is that the risk to overall GDP growth over the next six months is still very significant,” he added.

The Cambridge, Massachusetts-based NBER has not declared a recession and is unlikely to do so for many months. Feldstein, who is also an economics professor at Harvard University in Cambridge, will step down from his NBER post at the end of the month.

Feldstein said the current downturn was different from the norm because it was triggered by the housing slump rather than tightening of U.S. interest rates. As a result, housing also holds the key to recovery, he said.

Some investors this week took solace in the fact that pending home sales for April rose by 6.3 percent, far surpassing forecasts for a 0.5 percent decline.

However, Feldstein said home prices mattered more than the volume of sales in predicting when the housing market will hit bottom.

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“We have fundamental uncertainty about what is going to happen with house prices,” Feldstein said.

House prices probably need to fall another 15 percent to undo the gains built up during a bubble in the earlier part of the decade, but there was no guarantee that they would stop falling when they reached that point, he said.

“If we have an excess supply of houses, and more houses are being dumped on the market through foreclosures, that’s going to put further downward pressure on prices. Just as we could have a bubble on the upside, we could have a spiraling down in house prices,” he said.

As a result, it is hard to predict when the economy might return to normal growth rates.

Feldstein said it was conceivable the United States could go through several years of higher-than-normal inflation along with subpar growth, creating a mild form of the stagflation that plagued the country in the late 1970s.

(Editing by Jonathan Oatis)

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