Bleak Economic Trends

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Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson appeared before the Senate Banking Committee Thursday in the wake of reports that (1) home prices fell during 2007 amid predictions that potentially larger declines will occur this year - a development that would make 2007 and 2008 the first time since the Great Depression that home prices decreased two years in a row; (2) the economy experienced a dramatic slowdown in the fourth quarter, growing at an anemic 0.6 percent annual rate (with industrial production actually declining); (3) consumer and producer price inflation significantly accelerated last year; (4) nonfarm employment fell in January for the first time since August 2003; (5) business activity in the nonmanufacturing sector decreased in January for the first time in 58 months; (6) the dollar has entered its seventh consecutive year of decline, as the trillions of dollars slushing around in the coffers of America's foreign lenders continue to lose their value, aggravating our creditors who have been financing our consumption binge; (7) the S&P 500 stock index has fallen nearly 15 percent from its October high; and (8) a nasty credit crunch continues to exact its toll across the nation and throughout its financial markets as commercial and investment banks report multibillion-dollar losses linked to the worsening housing and mortgage crises.

Even as economists at Goldman Sachs, Merrill Lynch, Morgan Stanley and elsewhere in the private sector have predicted that a recession has either already begun or will soon commence, Mr. Bernanke and Mr. Paulson reported that their current economic forecasts project that the U.S. economy will avoid a recession in 2008 and continue to grow during the year.

To be sure, the Federal Reserve has been revising its forecasts downward. In June, long after the housing crisis had begun, the Fed projected that the economy would grow between 2.5 percent and 2.75 percent during 2008. In late October, it lowered its growth forecast to a "central tendency" between 1.8 percent and 2.5 percent. At the Banking Committee hearing, Mr. Bernanke said the Fed's latest forecast, which will be unveiled when the Fed delivers its semiannual monetary policy report to Congress this week, "will show lower projections of growth, and they'll be reasonably consistent with what we're seeing with private forecasters." However, he said that "growth looks to be weak but still positive during the first half of the year," and he added that the Fed expected "strengthening later in the year."

The Banking Committee Chairman, Sen. Christopher Dodd, Connecticut Democrat, wanted to know why the Bush administration recently projected an "excessively high" 2008 growth rate of 2.7 percent in its fiscal 2009 budget and in its 2008 Economic Report of the President, which was released Monday. …