All this
good news is, of course, bad for the news business. The sunny
predictions suggest two familiar economic catch-phrases: ``soft
landing'' and ``Goldilocks economy.'' The Federal Reserve stops
raising interest rates before it causes a recession; that's the
soft landing. Economic growth is then fast enough to keep unemployment
low and not so fast as to trigger higher inflation; that's the
Goldilocks economy, not too hot or too cold.
Could anything
darken the outlook? Here are five candidates:
-- Housing
goes bust. Higher mortgage rates have already dampened demand
and prices. From 5.6 percent in June, rates on 30-year fixed mortgages
have increased to 6.3 percent. They may reach 6.7 percent by year-end
2006, says Orawin Velz of the Mortgage Bankers Association. A
``bust'' would involve sinking prices after some big gains: about
25 percent over the past two years. That could depress consumer
confidence and spending. If rates on adjustable-rate mortgages
(more than half of new loans in 2004) rose sharply, more homeowners
might miss monthly payments. But most forecasts aren't glum. For
2006 the mortgage bankers expect average housing prices to rise
6 percent, almost equaling the increase in personal income.
-- The
dollar ``crashes.'' In 2005 the U.S. trade deficit was $712
billion, estimates Moody's Economy.com. That's up from $624 billion
in 2004. The willingness of foreigners -- including central banks
in China and elsewhere -- to invest their surplus dollars in American
stocks and bonds raises U.S. share prices and reduces U.S. interest
rates. A dollar sell-off could do the opposite, hurting housing
(above) and consumer spending. Though plausible, similar warnings
in the past never came true.
-- General
Motors files for bankruptcy. Bankrupt Delphi -- GM's biggest
parts supplier -- and the United Auto Workers are negotiating
tensely over Delphi's demands for deep wage and benefit cuts.
If the UAW were to strike, GM might also shut down (no parts,
no cars) and suffer massive losses. A four-month strike could
cost GM $20 billion, estimates Jonathan Steinmetz of Morgan Stanley.
GM would still have to pay workers and outstanding supplier bills.
GM itself might file for bankruptcy. Because everyone -- GM, Delphi
and the UAW -- has so much to lose, Steinmetz doubts a doomsday
outcome. Delphi, the UAW and GM will settle.
-- Oil
jumps to $85 a barrel. Energy economist Philip K. Verleger
Jr. thinks prices could rise up to 25 percent from 2005's peaks,
driven partly by a scramble for low-sulfur oil to meet stiffer
U.S. air-pollution rules for cars and trucks. Supply disruptions
(from weather, political upheavals, terrorism) or refinery outages
could also create scarcities. Still, the U.S. Energy Information
Administration predicts steady prices of $63 a barrel for West
Texas Intermediate crude -- roughly even with the last half of
2005. Nariman Behravesh of Global Insight sees $57 WTI by the
year-end.
-- The
``yield curve'' of interest rates ``inverts.'' An inversion
means that short-term interest rates (say, on three-month Treasury
bills) exceed longer-term interest rates (say, on 10-year Treasury
bonds). Usually, short-term rates are lower, because the risk
of lending for lengthier periods is greater. Since 1965 interest-rate
inversions have occurred seven times -- and recessions have followed
in five, notes Bill Dudley of Goldman Sachs. The reason: an inversion
signals tight money. In 2006 Dudley expects another inversion,
as the Fed raises short rates. But he thinks we'll escape a recession,
because the overall level of rates will remain low.
There are
other potential pitfalls. Will China's surging economy produce
an unpleasant surprise? Will Ben Bernanke's replacement of Alan
Greenspan go smoothly? But the larger story of the U.S. economy
has been that it continually overcomes many reasons for it to
falter. Consumers have spent freely, drawing money from appreciated
stocks or homes. From 1995 to 2005 consumer spending rose an average
of 3.8 percent annually, notes Susan Sterne of Economic Analysis
Associates. Now that may cool with the housing boom.
But something
else (business investment, higher exports) will fill the gap.
So say the standard forecasts. They're often right when predicting
small shifts in the status quo. But they usually miss big changes,
for good or ill. If something truly bad happens in 2006, you probably
won't read about it first. Happy New Year.
