Before I explain what the bond market is telling us, let's talk about why the economy may be at a turning point.
Between mid-2003 and mid-2006, economic growth in the United States was fueled mainly by a huge housing boom, which created jobs directly and made it easy for consumers to spend freely by borrowing against their rising home equity.
That housing boom has now gone bust. But the optimists and pessimists disagree both about how bad the bust will get and about how much damage the housing slump will do to the economy as a whole.
The optimists include Alan Greenspan, whom some accuse of letting the housing bubble get out of hand in the first place. On Tuesday, he told investors at a conference that the worst of the housing slump is over, saying that "it looks as though sales figures have stabilized."
That's like saying a tortilla is about as flat as it's going to get.
Maybe the best answer is to look at what the financial markets say. Not the stock market, which is a notoriously bad indicator of the economy's direction, but the bond market. (Paul Samuelson, the Nobel Prize-winning M.I.T. economist, famously quipped that the stock market had predicted nine of the last five recessions).
Here lies technical shit, yada, yada, yawn.
How serious a slump is the bond market predicting? Pretty serious. Right now, statistical models based on the historical correlation between interest rates and recessions give roughly even odds that we're about to experience a formal recession. And since even a slowdown that doesn't formally qualify as a recession can lead to a sharp rise in unemployment, the odds are very good - maybe 2 to 1 - that 2007 will be a very tough year.
Luckily, we've got good leadership for the coming economic storm: the White House is occupied by a man who's ideologically flexible, listens to a wide variety of views, and understands that policy has to be based on careful analysis, not gut instincts. Oh, wait.
Shorter last paragraph: the economy is toast.
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