|Hard Landing Ahead|
|Topic||Employment, Unemployment, and Inflation, Monetary Policy, and Recession|
|Key Words||Recession, Soft Landing, Unemployment, Interest Rates, Wealth Effect|
There is a mounting body of evidence that the economy is slowing. Will the economic descent be gradual according to the master plan drafted by Alan Greenspan? Or, has the economy fallen so far so fast that a recessionary hard landing is inevitable? Stephen Roach, chief economist at Morgan Stanley Dean Witter, argues that the economy has stalled and that another shock, perhaps in the form of another decline in the stock market, could bring a recession both here and abroad.
As economic growth diminishes, people will find their incomes shrinking as overtime, bonuses, capital gains and possibly their jobs also dwindle. Decreases in income make it more problematic for consumers to service the credit card, home mortgage, margin and home equity debt that they accumulated in the 1990s. Decreased revenues lead firms to reduce their capital spending, causing further reductions in aggregate demand.
Unit labor costs will rise with as the economy slows, and businesses will attempt to pass these increases to their customers. These increases coupled with oil price hikes and rising health care costs, mean that there is a risk of significant inflation according to Roach. Since monetary policy acts with a significant lag, the Fed may find itself in a catch up mode, attempting to correct a problem that has already occurred.
(Updated January 1, 2001)
|Source||Steven Pearlstein, "The Landing Ahead: Hard or Soft?" The Washington Post, December 10, 2000.|
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