That Soft Landing May Actually Be Hard
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The economic ride in 2007 could be a lot bumpier than we’ve been led to believe. More and more potholes are starting to pop up, suggesting that talk of a next year’s widely expected soft landing — GDP growth of between 2% and 3%, versus a hard landing (growth of 1.5% or less) — is becoming increasingly suspect.
Apparently, some economists are getting concerned, having recently lowered their numbers below the consensus forecast of 2007 GDP growth of 2.5% and heading toward hard landing territory. Likewise, a number are increasingly raising the R word (recession). This is not what rising stock markets are all about.
A University of Maryland professor of economics, Peter Morici, is one of those sounding an ominous note. “I think there’s now a 50% chance of a recession,” he tells me. Here’s his rationale:
• The decline in new home sales is running deeper than expected and commercial construction is starting to falter.
• Christmas sales are running slower than expected, firm evidence that the consumer is starting to pull back.
• Manufacturing activity has stalled.
• Automotive layoffs are on the rise, and the failure of top management at General Motors and Ford to address ongoing structural problems, other than by cutting staff, is a terrible drag on the economy.
Mr. Morici says the Federal Reserve’s happy talk about the solid footing of the economy is just that — happy talk. The Fed, he says, seems intent on risking a recession to contain inflation. He also warns that unless the Treasury secretary, Henry Paulson, succeeds in his talks with China to revalue the yuan, “Americans can expect slow growth and a lousy job market.” In fact, sub-par growth — 2% in the fourth quarter and 2.5% for all of next year — is what he sees on the horizon. This year’s growth is estimated at around 3.5%.
Merrill Lynch’s North American economist, David Rosenberg, has just dispatched a disturbing commentary to clients in which he notes: “It’s getting harder to call it a soft landing.” Citing the rapid deterioration in the housing market, Mr. Rosenberg has shaved his estimated 2007 GDP growth to just 1.7% from 1.9%. This reduction also factors in his view that, contrary to consensus thinking, the downturn in the housing market will spill over into the consumer sector.
That already may be happening, he says. After years of piling up debt and running down savings, there is already some evidence that households have embarked on balance sheet repair, Mr. Rosenberg observes, as seen by the sharp swing in the savings rate — to 0.6% in October from 1.7% in July.
On top of this, he notes, there are signs of moderation in the job market. And with the construction sector contracting and manufacturing now rolling over, he sees outright job losses as early as next spring, moving the unemployment rate to 5.4% by the end of next year from the current 4.5%. As a result, he expects consumer spending to slow to just 2.2% in 2007, a material drop from this year’s 3.1% rate.
Further, he thinks the downward shock to household wealth — a 5% decline in home prices and a slowing in the buildup in housing stock in 2007 — will shave almost $2 trillion from housing wealth and keep the consumer rebound very subdued.
As such, he also raises the possibility of a hard landing, which could hand the stock market a drubbing. Mr. Rosenberg notes the forward price/earnings multiple of the S&P 500 typically hits a low of 12 during hard landing phases, as they generally involve credit events that generate heightened investor uncertainty. Indeed if there is a hard landing — and Merrill’s in-house recession indicator suggests 55% odds of such an event — the S&P 500 could test the 1,150 mark next year (a 20% correction), he says. The index closed Friday at 1,409.
A Morgan Stanley economist, Richard Berner, also raises the danger that the soft landing scenario may be at risk, noting that the risks that economic growth could stay weak longer have increased. Income data, he says, depict a rapid deterioration in fourth-quarter economic growth, one that will likely extend into the first quarter. “We need no convincing,” he adds, “that the housing downturn still has a long way to go.”