Skirting the R-Word

by Stephen Fleischman

The US economy is walking a tight-rope.

The sharp drop-off in growth in the first quarter of 2007, and the expected weak second and third quarters of less than 2% growth, caused the widely watched UCLA Anderson Forecast, a leading national economic forecaster, to conclude that although we may not actually be in a recession “it is certainly close.”

Only days later, the New York Times reported a $3.2 billion move by Bear Stearns, the investment bank, to bail out one of its hedge funds that was collapsing because of bad debts on sub-prime mortgages.

The Anderson Forecast saw the slowed economy as lasting longer than previously expected. Weakness in the housing market and higher gasoline prices are starting to affect consumer spending. California, hit by a “double-whammy” from construction and mortgage finance, foreshadows a drag on the rest of the economy.

A recession is usually defined as a decline in a country’s real Gross Domestic Product (GDP) for two or more successive quarters. Market-oriented, or capitalist, economies are characterized by economic cycles. The business cycle represents swings between periods of relatively rapid growth and periods of relative stagnation. Capitalism is noted for its cycles. Its nature is to boom and bust.