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Wessel: Housing, Oil Woes Make Recession Likely

A foreclosure sign is seen in front of a home in Antioch, Calif.
A foreclosure sign is seen in front of a home in Antioch, Calif.

The combination of a troubled housing market, rising oil prices and credit problems stemming from the subprime lending crisis is likely to lead the economy to recession, according to Wall Street Journal economics editor David Wessel.

"Housing is worse than we anticipated ... oil prices are higher and going higher" and tightening credit conditions will make it harder for consumers and businesses to borrow, Wessel tells Renee Montagne.

But many forecasters believe the resilient U.S. economy will avoid a recession.


"The more optimistic people say that exports will bail us out of this," Wessel notes. "The dollar is weak and that makes our exports more attractive to foreigners. And foreign economies — China, Europe — are pretty strong, so that gives us a ready market."

Optimists also say that as long as the job market holds up, "people will have money to spend and they'll keep spending," Wessel adds.

But he says that exports and the job market aren't strong enough to offset the downsides of a housing slump, high oil prices and a credit crunch.

The economy has seen big housing busts before, but this one is different, Wessel says.

"We haven't in the past seen such a steep rise in housing prices that created so much wealth and so much ability to spend and so much headiness among lenders, then followed by such an abrupt decline," he says.


The "widespread reach of housing throughout the economy" and the fact that the housing sector isn't stabilizing as expected in the spring make a recession likely, Wessel says.

Wessel says his guess is that the economy will go into a short and shallow recession, and that the Federal Reserve will cut interest rates enough to prevent a sharp downturn.

The Fed cut the key federal funds rate by a half-point in September — the first such reduction in four years. The central bank may cut rates again at its meeting Wednesday, but Wessel says that wouldn't help the economy in the next few months because it takes longer for rate cuts to have a wide impact.

And Wessel isn't sure a rate cut is coming. The Fed has been sending confusing signals about its next rate decision, he says.

"There are some people at the Fed who think they did quite a bit already and they should wait and see if the economy heals itself," Wessel says.

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