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Recession Risk Rising with Higher Oil?


NEW YORK (CNNMoney.com) -- There was a time when economists predicted that $60-a-barrel oil would cause a recession. Then they said $70 oil would. Then $80.


So it might be tough to take the recession threat of $90 a barrel oil very seriously. But some economists say that would be a mistake. They note that the current record-high oil prices are hitting when the economy is at its most vulnerable point in years - with the housing downturn, credit crunch and sliding value of the dollar posing threats that weren't present when oil passed its previous benchmarks.


"The whole game has changed," said John Silvia chief economist of Wachovia. "If they're sustained here, going into the holiday season, you're going to have a pretty horrendous fourth quarter."


Silvia said the downturn in housing and the problems in credit markets that hit in August have left the employment picture significantly weaker than it was six or nine months ago, when oil prices took gasoline prices into record territory.


"The background is totally different now than it was in the spring," he said. "The ability of the system to respond just isn't as great as it was then."


Still, Silvia says there slightly less than a 50-50 chance of a recession in the coming months, even if oil prices don't ease up....


But Lakshman Achuthan, managing director of the Economic Cycle Research Institute, believes that the economy has shown enough underlying strength, especially in the labor market, to take even this latest oil shock.


"There's obviously not a magic number [on oil prices] that defines if economy will tip into recession," he said. "It might be easier if prices were lower. It doesn't feel good to dig into your pocket for extra gas or mortgage money. But it makes a big difference whether or not you're getting a paycheck."


Achuthan points out that despite all the focus on the credit crunch and housing downturn this year, the economy grew at a 3.8 percent annual rate in the second quarter. Furthermore, the third quarter is only forecast to slow to a 3.1 percent pace of growth when the government gives its first reading on the quarter's gross domestic product on Wednesday.


"Certainly we're slowing, but you have some room to slow without going in recession," he said. "You can never say never, but it [a recession] should not be the predominant concern. There's more resilience in this economy than people think, because you have not had a recessionary downturn in this employment market yet."

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