Purdue economist still optimistic about economy

The U.S. economy hasn’t slipped into recession yet. But it is flirting with one, according to Purdue University economist Charlene Sullivan. Consumer and lender confidence levels will determine the slope of the slide.

“You’re in a recession when your neighbor loses his job,” she joked. “You’re in a depression when you lose your job.”

Sullivan delivered her prognosis before Purdue’s Executive Roundtable Luncheon yesterday in downtown Indianapolis. An associate professor of finance in the Krannert School of Management, Sullivan also serves on the board of directors of the Federal Reserve Bank of Chicago.

To qualify as a recession under the official definition, Sullivan noted, the national economy must post two consecutive quarters of decline. In 2007, U.S. gross domestic product grew 2.2 percent, she said, and the growth continued through the end of the year. Numbers aren’t ready for 2008’s first quarter, although Sullivan expects it to show a slowdown or contraction.

That means 2008’s second quarter likely will determine whether the term recession can be accurately applied. Sullivan pointed out that federal tax rebates should serve as a significant stimulus.

“If getting checks for $160 billion at the end of May doesn’t help us get through June, I don’t know what will,” she said.

Many of the indicators that gauge the American economy’s strength remain healthy, Sullivan said. Prices of durable goods, such as vehicles and appliances, have remained relatively stable. National unemployment remains below 5 percent. The health care sector has been adding jobs at a blistering pace. And thanks to the weak dollar, demand for exports of U.S. manufactured goods has increased.

But troubles in the housing market have seriously dented consumer and bank confidence. With home values dropping at the same time food and gasoline price inflation is growing, she said, many individuals are cutting back on their spending. Simultaneously, banks are tightening their credit standards, a factor that contributes to the slowdown. Consumer spending is responsible for about 70 percent of GDP.

“If [former Federal Reserve Chairman Alan] Greenspan were here, he’d say that’s a hell of a headwind,” Sullivan said.

In the days to come, Sullivan expects the fallout of the Federal Reserve’s Bear Stearns bailout to motivate increased regulation of the investment banking industry, which could prove a drag on business growth.

“I’m anticipating whatever legislation comes out of this will make Sarbanes-Oxley look like a cakewalk,” she said.

But, overall, Sullivan is optimistic about the U.S. economy’s prospects. She said Americans may have to get used to 2-percent annual economic growth, rather than 3 percent to 3.5 percent. Even so, Sullivan said the nation is still a long way from a recession – particularly a prolonged one – unless a doom-and-gloom media steadily drones the public into one.

“A lot of smart people got us into this mess, and they still want to get paid,” Sullivan said. “So I think they’re going to work hard to keep us out of recession.”