The Denver Post - Economic decline may have arrived in US, will Europe be next?

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Economic decline may have arrived in US, will Europe be next?

Signs that the U.S. economy is headed toward recession — or is already there — gathered steam Tuesday amid a maelstrom of reports that drove the Dow Jones industrial average down 277 points to a nine-month low. Retail sales plunged in December, Citigroup announced the biggest quarterly loss in its 196-year history and thousands more job cuts were revealed, rattling Wall Street and pushing the yield on the 10-year U.S. Treasury note near a four-year low. Former Federal Reserve Chairman Alan Greenspan was quoted as saying the economy may already be in a downturn, and one analyst called it "almost indisputable now" that the economy contracted in December. Also, wholesale inflation for 2007 surged the most in 26 years, raising the viselike specter of consumer- crushing stagflation — a state in which the economy stagnates or contracts but prices continue to rise. Consumer spending, the critical bulwark that has kept the country out of recession, is showing signs of cracking. The Commerce Department reported that retail sales fell by 0.4 percent last month as consumers handed retailers their worst Christmas in five years. All the problems weighing on the economy could prompt consumers — who account for two-thirds of economic activity — to limit or even stop shopping.

U.S. policy-makers continue to defend the prospects for U.S. economic growth. Henry Paulson, secretary of the treasury, appears tireless in proclaiming the economy as "fundamentally sound." In this scenario, the 1.8 million sub-prime mortgages due to be reset this year and next, presumably to higher interest rates, merely present a problem in need of a refinancing solution. ("We do expect that the housing market turbulence will take some time to work through," Paulson averred last month, "and that there will be some penalty on our short-term economic growth.") But this short-term turbulence, which is feeling rather long-term, ignores the legions of non-subprime homeowners who fell into the habit of repackaging mountains of debt into interest-only lines of credit linked to appreciating house values, which, at least in pockets, have vaporized.