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December 31, 2008

Have housing prices dropped?

The turmoil in the housing and mortgage markets has been a big part of our economic troubles, and one of the fallouts has been a drop in housing prices. But have home prices really dropped, and is it that easy to determine?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It's really not; in fact, there are three problems with measuring changes in home prices. One, the houses that sell aren't the same each year. Secondly, all homes don't sell each year, and thirdly, you have big geographical differences in home prices. There are several ways that economists have developed to measure changes in home prices. Some of the best look at what are called repeat sales, where you're tracking the same homes each year, so you take out the problem that the house that sells this year is not the same as the house that sold last year. There are also indices that are based on constructing statistically a typical home with its characteristics and then tracking the price of that. The conclusion of all these indices is that we are in a period of time - very unusual - where home prices are going down. All the indices show this. It's a matter of degree. Some of them show home prices falling 6 percent over the last year, some of them showing home prices falling 20 percent over the last year. Most of the forecasts for home prices indicate that this drop in price will continue into 2009, and indeed, it's really going to have to stop before the economy rebounds."

Posted by Dave at 08:00 AM

December 30, 2008

Closing the gap

Governments around the nation and in our state are looking at budget gaps for the upcoming fiscal year. The gaps result from the recession's slowing revenue growth at the same time that our economic downturn has increased calls for help from many citizens. How do our elected officials deal with this gap in spending needs over revenue availability?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"You know, we're reading more and more about this problem, and it happens every time there's a recession. We're reading, for example, about cities and county commissions, school boards and, of course, the state all having problems with their budgets because of exactly what you said, that revenue growth is slowing and spending needs are still there, so there's a gap, and how do you close the gap? Well, of course you can close it in one of two ways or a combination. You can do it on the spending side, where you try to pare spending or plan spending. Now the easiest way to do that, of course, is what's called across the board cuts. You simply tell all departments that they're to cut 5 percent or 7 percent or 10 percent. That's the easy way to do it. Of course, another way would be to go in and get into the minutiae of all those departments and try to prioritize and cut those programs that you feel have higher priority less than you cut the programs that have lower priority. But that does require you to prioritize, that's a very hard thing to do in the public sector. The other way you can try to close the gap is to bring in more revenue, but the problem there is that typically during a recession, you don't want to tax people more because you want people actually to have more money to spend. So this is a very, very difficult period of time for our elected officials to go through. It's not the first time they've been in this position. It's not the last time they will be in this position, but I think this is really when they do earn their pay."

Posted by Dave at 08:00 AM

December 29, 2008

How recessions end

If the economy is now in a recession, the next question is, how do we get out of it? The government has already done a lot, and more is likely to come. What really causes a recession to end?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, in a phrase: bargain hunters. What happens is that at some point, there will be enough investors, there will be enough entrepreneurs who see bargain prices for things like stocks and real estate and even workers in terms of lower wages paid to hire them that these investors and entrepreneurs will start buying more stocks. They'll start buying more real estate. They'll start hiring more workers, and as this happens, that will pull the economy up. More spending will occur in the economy, and that will effectively bring us out of a recession. So what this means is that the softness that we're now seeing, for example, in prices – and we have gone through a couple on months in which prices have gone down and the softness we're seeing in workers' wages and salaries; that is, workers are not being able to bargain for big increases in their wages and salaries - that softness is really a necessary first step to ending the recession. But the big wild card here, of course, is how long does it take for these investors and entrepreneurs to perceive the bargains, and when is the bottom of those bargains, when is the best time for them to move. That's the big unanswered question. But I do know that it will eventually come."

Posted by Dave at 08:00 AM

December 26, 2008

Bringing in the customers

With the Christmas retail season expected to be challenging this year, businesses are looking for ways to attract more buyers and sell more products. What are some of the common ways to do this?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, the most obvious way is to cut prices, and that's based on the simple economic principle that lower prices cause there to be more buyers, and those buyers are going to buy more stuff. And revenues can actually rise to the retailer to offset those lower prices if the volume goes up enough; that is, if they sell enough product. Now there's a more sophisticated way of doing this, and that is not to cut prices for all consumers but to target the price cuts to customers who might need that additional push. And businesses do that with coupons or circulars. That is, you only get the price reduction if you have the coupon or circular, and this means that business can, therefore, have the regular customers pay the regular price, but those new customers - those customers they're trying to attract, who bring the coupons or circular - they get the lower price. But the whole principle here revolves around the issue of price. The simple thing is: lower the price, you're going to get more customers."

Posted by Dave at 08:00 AM

December 25, 2008

Recessions and depressions

We're hearing two words to describe the condition of today's economy: recession and depression. How do economists distinguish between these two events?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first of all, we just had announced by the group that makes these calls - it's a group that sits outside the federal government - that we are, indeed, in a recession. And we've been in a recession since December of 2007. Now, the difference, however, between a recession and a depression is really a matter of degree. And economists somewhat arbitrarily have divided the two. A recession occurs if the economy shrinks by less than 10 percent. A depression occurs if the economy shrinks by more than 10 percent. Now the last recession we had in 2001, the economy shrunk by one-half of 1 percent, clearly in the recessionary category. This recession, of course, is not over. Many economists think it will last well into 2009, but the current thinking is that it will cause the economy to shrink somewhere around 3 or maybe 4 percent, again still far short of a depression. So I think we can at least as we sit now, throw out the possibility of this downturn being categorized as a depression."

Posted by Dave at 08:00 AM

December 24, 2008

Big swings in stock prices

It seems that the stock market, at least recently, has gone through wild gyrations. One day the market is down 3 percent, and the next, it rises 3 percent. And of course over the last year, some broad measures of the stock market are off almost 50 percent. Why does the stock market change so dramatically?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think because the stock market is actually a reflection not only of today but of tomorrow. And you can think of a price of a stock, a stock value if you will, as reflecting those long-term prospects for that particular company as well as the economy. So that means that what look like small changes in the economy are multiplied over many, many years as stock holders and stock buyers look forward to what those impacts will be many years down the road. And so that is going to result in major swings, as you've cited, in the stock market, both up and down, particularly when the economy is going through change as it is now. There's so much uncertainty about where the economy is going, how deep the recession will be, when will we get out of the recession. Every little piece of news that comes in adds to those forecasts about where the economy is headed. And then you multiply them by the fact that any change today has these multiplied effects over many years. The bottom line is that's why you get these big, big swings both up and down in the stock market."

Posted by Dave at 08:00 AM

December 23, 2008

Can recessions be prevented?

As it appears increasingly obvious that the economy is in a recession, a big question is whether the recession could have been prevented. If recessions can be prevented, a lot of pain in the economy can be avoided.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, you're absolutely right. In fact, there was legislation passed by the federal government after World War II essentially saying it's the policy of the federal government to try to prevent recessions. But this is very, very hard to do. First of all, you have to recognize that a recession is coming, and that's not easy. For example, a year ago, the top forecasters in the federal government, particularly in the Federal Reserve, were forecasting that the economy would continue to grow. Secondly, even after you detected an oncoming recession, government actions are not going to have instant results. One reason is because our economy is so big; it's a $14 trillion economy. And think of that as a large luxury liner ship and the federal government as a little tugboat that's trying to nudge it one way or the other. The federal government may be able to nudge the economy a little bit, but it's not going to turn the economy around. I think the best that we can hope for regarding federal government policy and recessions is that once we have a recession, we can contain it; we can sort of ease the bleeding."

Posted by Dave at 08:00 AM

December 22, 2008

The auto manufacturing industry in North Carolina

There's been an ongoing debate about assisting the big three U.S. auto manufacturers, but as many would put it, does North Carolina have a dog in this game? Put another way, does our state have any connection to the domestic auto manufacturing industry?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Actually, we do. We are actually a state that has a significant vehicle parts manufacturing component. We don't assembly the cars in North Carolina, but we make the parts that obviously become the cars. And the industry has grown quite a bit over the last 30 years. We had 10,000 workers in this industry in 1977. Now, we have about 35,000. And output has grown even more. Output has grown 1,200 percent over that time period. Now, this is part of the growth of the entire auto industry in the South. Many of our neighboring states actually have assembly plants. In the short run, if we do have problems in the auto industry, and if we do have contraction, if you will, of the big three in Detroit, out factories here could suffer a little bit. In fact, they're already downsizing somewhat due to the recession, but I think in the long run, more and more of the auto industry in America will be located here in the South, and that includes North Carolina."

Posted by Dave at 08:00 AM

December 19, 2008

Is deflation good?

We're hearing the word "deflation" today in discussions about the economy. What is deflation, and is it something we should welcome or worry about?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, actually deflation is the opposite of inflation. Inflation means that on average, prices are rising. Deflation means that on average prices are going down, and we've actually seen a little bit of deflation over the last couple of months, primarily due to lower energy prices. Now, many people might think, wow, that's great, prices are going down. But there are two potential problems. One is that if prices go down for many months, you'll actually see wages and salaries also go down. They move in tandem. The other factor is debt. Your debt can actually get bigger, relatively speaking, if we have deflation. How so? Because your debt payments are usually set in a particular dollar amount. So if your salaries and your wages are going down because prices are going down, that makes your debt actually relatively more expensive. Now the Federal Reserve can counter deflation simply by printing more money, and if we do get into a deflationary spiral, I think that's exactly what they'll do."

Posted by Dave at 08:00 AM

December 18, 2008

Is there a reason to look at stocks?

The stock market appears to have no direction, up one day and down the next. Many investors are simply staying away from it, while others are suggesting now is the time to buy. Why would anyone want to consider stocks in today's economic environment?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There are two reasons why now may be the time to get back in the stock market, according to some analysts. One is that the stock market always looks ahead. So, although the economic news may be gloomy right now, the stock market is trying to figure out, where is the economy going to be six to nine months down the road. And some are saying it's actually going to be better. Well, if that's the case, that may send the stock market up. The second is a technical reason, and that is simply that stocks look cheap now. One of the key indicators of that is the so-called price-earnings ratio, and that is below historical averages. So that should suggest that that ratio will come up, meaning prices will come up. Now, a pitfall of that idea may be that, yes, the price-earnings ratio is below averages, but it can still go down. Regardless, I think there are some indicators the stock may be a good buy right now. So if you are a contrary investor and if you have a strong stomach, this may be the time to take a plunge into that volatile market."

Posted by Dave at 08:00 AM

December 17, 2008

North Carolina's economic outlook

Dr. Mike Walden just published the latest edition of the North Carolina Economic Outlook, which includes analysis and forecasts of our state economy through 2009. Give us a sneak preview.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Like the nation, I do think unfortunately North Carolina is now in a recession. I think it began in early 2008. And in fact, jobs are down since then by a little under 1 percent. I think the recession in North Carolina will continue through at least the first half of 2009. Jobs will continue to drop, unfortunately. The unemployment rate will rise, and I think it will increase a full percentage point in 2009. Retail sales and wages, both adjusted for inflation, have been falling. I think they will continue to fall in 2009. The one glimmer of good news that I see for 2009 is I think the housing market will bottom out, and we'll actually see an increase in housing sales in 2009 compared to 2008. But before you get real excited about that, this is going to be an increase over a very low base. That is, the housing market is very down right now, so if we have an increase next year, it's still not going to mean that the housing market is back on track. But it will mean that the market is moving in the right direction, and a recovery in the housing market will help North Carolina's economy overall also recover."

Posted by Dave at 08:00 AM

December 16, 2008

Paying for the rescue

The federal government is doing a lot to contain the recession, but how will these efforts be paid for? When will the check come due, and in what form will payment occur?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There will be two ways that we pay for this rescue, if you will, of the economy. One will be, I think, a way that most people understand, and that is by having a larger debt. That is, much of the money that the government is using to try to stimulate the economy is being borrowed. It's being borrowed from internal sources, also foreign sources. That means the national debt will be higher. That means interest payments on that debt will be higher. That means there will be less money in the future to spend on other things. The second way that the government is trying to tame the recession is simply by printing money. This is under the control of the Federal Reserve. It's actually a recent move by the Federal Reserve to crank up the printing presses, and we could pay for this in the future through higher inflation. If this printing press process goes on long enough and is strong enough, we could see inflation rise, not immediately, but maybe in a year or two. And of course with higher inflation, that means our dollars buy less. And so that's a second way of paying for this. The whole notion here, of course, is that it's not that government officials don't recognize these costs, but they think that the benefits of doing this now to help the economy are worth the future costs."

Posted by Dave at 08:02 AM

December 15, 2008

The next fiscal stimulus

There's talk in government circles that the federal government will pass a second economic stimulus plan in the near future. If so, will this plan be different from the one passed last summer?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think so. Last summer, we had a fiscal stimulus based on tax rebates. In essence, the government said we're going to reduce your taxes, temporarily give consumers money to spend. From the government's perspective, we didn't spend enough. Many people took that money and paid down on their debt, or they saved it, all of which made logical sense for individual households but wasn't the purpose of the program. The government wanted people to spend the money. So the talk now is that the next stimulus plan, which I think will happen probably in the beginning of 2009, will be based on the government directly spending that money. And there's talk maybe of a $150 to $200 billion plan. And this spending will be directed on things like roads and bridges and public buildings and other infrastructure, essentially public works. And I think the reason the government is favoring this is because they're going to get more spending per buck that they allocate. In fact, virtually all of that money will be directly spent, whereas if it goes to households, again, some of it will be siphoned off and paid down on debt and saved. And right now, the purpose, again, in the economy is to get spending up to end the recession."

Posted by Dave at 08:00 AM

December 12, 2008

The return of saving

There's been much anticipation that saving will come back in vogue as households try to repair damage to their net worth caused by the declines in both the stock and housing markets. Is there any evidence yet that this is actually occurring?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first a little background. What we're looking at here is the savings that people do out of their paychecks, so essentially what we're saying is, What percent of take home pay are people putting into some kind of savings account? And that percentage has been declining for a number of years. In fact, it reached 0 percent in 2006. Now this doesn't mean that people weren't saving in other ways. Their stocks were going up. Their home equity was going up. But the point here is that out of their paychecks people in 2006 essentially weren't saving anything. Well, we have seen a turnaround in that, in fact, I think directly due to the fact that the housing market has sputtered. The stock market has gone down. What we're seeing now this year for the first time really since 2006 is an upward trend in savings rates. We're actually seeing people saving more out of their paychecks. It reached 3 percent in a recent month. That's certainly nothing to write home about, but it is moving in the right direction, and it is actually expected that that will continue because, again, if people can't see their housing and their stocks generating savings for them, the only way they're going to save is to do it out of their paycheck. So I think this will come back in vogue, saving out of your paycheck will be back in style."

Posted by Dave at 08:00 AM

December 11, 2008

Some hope for housing?

You and other economists have emphasized that a turnaround in the housing market is absolutely vital for there to be an end to the recession. Have we seen anything yet that would give us some optimism that a turnaround is anywhere in the near future?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Still, the essential problem is that we have too many homes for sale relative to how many households are buying those homes. And there are two indicators that economists look at to gauge whether the housing market is improving. One is the number of months of unsold home inventory. Typically, it's around 6 months. In a typical year, we have around 6 months of inventory for sale in the housing market. It got up to a high of 12 months earlier this year. It has backed off a little bit to somewhere between 10 and 11 months, so that's one sign of slight improvement. The other indicator of improvement is to look at existing home sales this year compared to the same time last year. And what we found in the last six months in the nation, existing home sales this year are at a higher level than they were for the same period last year. They're still not very high, but they're moving in the right direction. So these are two indicators that suggest there is some glimmer of hope in the housing market - which is actually crucial to get the economy back on track - but certainly we still have issues."

Posted by Dave at 08:00 AM

December 10, 2008

The LIBOR spread

As the current recession and financial turmoil unfold, we’re hearing new terms almost every day, and one of them is the LIBOR spread. What does this term mean, and why should we care?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The LIBOR is an interest rate. It's actually set in London; the 'L' stands for London. And it's an interest rate that banks charge each other for unsecured loans. The LIBOR spread is the difference between that LIBOR interest rate and the interest rate on a safe investment like a treasury security. So that spread represents the degree to which banks are willing to lend to each other, and if that spread gets big, it suggests there's a great deal of fear among banks, so much fear that they may not even be willing to lend to each other unless they get paid a very, very high interest rate. So analysts watch the LIBOR spread as an indicator of, again, fear in the financial markets and the degree to which the financial markets are freezing up. And so in October of this year, what we saw and what concerned the administration, the Federal Reserve, was that the LIBOR spread rose to an historic high. We had never seen it that high. And that was indicative of the fact that the financial markets were not functioning. Banks were not even willing to lend to each other, let alone to customers. And so that was the stimulus, if you will, to prompt the administration to ask for the $700 billion rescue plan for the financial markets. Now since then, since October, the good news is the LIBOR spread has come down, but it's still not back to normal levels, so this is suggesting that, yes, the financial markets have improved, but they are not yet normal."

Posted by Dave at 08:00 AM

December 09, 2008

Downsides of renegotiating mortgages

It's reported the government will now become directly involved in trying to change the terms of mortgages for homeowners having trouble making payments. This is obviously a tactic designed to try to stem the rising home foreclosures. But while such an action sounds good on the surface, are there any potential disadvantages associated with it?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Of course, we want to say that we certainly understand many households out there who are facing problems with paying their mortgages would welcome this kind of program. So we don't want to minimize that concern, but we did have a similar program during the 1930s, during the Great Depression, when the government stepped in and essentially forced lenders to renegotiate those mortgages. And it actually did help reduce foreclosures. But there was what I'll call a bitter aftertaste. There were some negatives later, because what happened once the economy got back on its feet is lenders remembered this. And they remembered that, gee, the government could come in and change the terms of this mortgage. There's a risk there, so what we saw happen was two negatives. We saw first of all, fewer lenders were willing to make mortgage loans, and secondly, the mortgage loans that were made carried a slightly higher interest rate, presumably to compensate for the risk that the government might come in and change the terms of that loan later. So with all kinds of government efforts to address the recession, we have to seriously consider what might be the possible later consequences."

Posted by Dave at 08:00 AM

December 08, 2008

The paradox of thrift

Many households are tightening their belts by borrowing less and saving more as a result of the ongoing recession. But while this behavior sounds good, are there any downsides for the broader economy if we all do this?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Yes, and it's called the paradox of thrift, and what this paradox simply says is that what might be good for the individual household may not be good for the entire economy. Our problem in the economy right now is that there's not enough spending, simply put. That's what a recession means, spending goes down and so production goes down and jobs go down. So to get the economy out of a recession, we need more spending. Well, if individual households, however, are saving more and spending less, you can see the problem. You can see that we're not going to get out of the recession if we're seeing the savings rate go up. This is one reason why we're having consideration of the so-called government stimulus programs. It's sort of like forced spending, where the government says, all right, if households aren't spending, we're going to spend. We're going to do that to sort of jumpstart the economy, and if we are able to spend money on things like roads and bridges and so forth, that will stimulate business. That will stimulate paychecks, stimulate employment and get people back in a spending mood. So we do need to have aggregate spending but of course, each individual household has to decide what kind of spending is best for them."

Posted by Dave at 08:06 AM

December 05, 2008

Oil and food prices

Food prices spiked earlier this year when oil and gas prices were rising so rapidly. Now that oil and gas prices are falling, should we expect food prices at the supermarket to also go down?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, certainly some individual items may go down in price. But when we're looking at all supermarket prices together, sort of taking an average, I don't think we'll see those prices go down. What I would expect to see is they will go up but at a much slower rate. And the reason is that although oil and gas prices are certainly components of the cost of producing food, there are many other cost factors: labor, rent, taxes, insurance. And so these costs are still rising and they tend to overwhelm, if you will, the falling gas prices. So, what I'm expecting is rather than food prices, for example, going up at the 6 percent rate they were going up earlier this year, I think in 2009 they'll go up at about half that rate - 3 percent - and, indeed, that's a victory for consumers."

Posted by Dave at 08:00 AM

December 03, 2008

Retirement planning

Planning for retirement is both a happy time and a scary time, particularly with the impact the stock market has had on many retirement funds. Many people may be asking whether they can afford to retire at all. What are some of the key financial factors people need to consider when they think ahead to retirement?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think that's a key statement: thinking ahead. Well, the first thing you need to do is you need to figure out, roughly, how much you're going to need in retirement in terms of income in order to spend what you want to spend. What people usually do is they take their retirement spending as a percentage of the spending they have done during their working years. The old rule was to expect to spend somewhere between 75 and 80 percent in retirement of what you spent while working. Many economists, however, say, 'No, make it 100 percent. Don't assume your standard of living is going down.' So anyway, you need to set that amount. Then you need to find out what resources you'll have to fund this spending: pensions, social security, other savings and assets, and you need to compare the two. Now, if your resources exceed your planning spending, then, great, you're on track to a great retirement. If you have a shortfall, then you have to decide how you're going to make up that shortfall. Are you going to save more while working? Are you going to work more years? Or are you going to plan to spend less in retirement? It's very important to make these decisions and comparisons well before you get to retirement so that you're not surprised."

Posted by Dave at 08:00 AM

December 02, 2008

Going where we haven't gone before

Many people say we're moving into economic territory where we haven't been before. How so?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think in two ways. First, many economists say that today's recession is actually the first recession of the globalized economy. Many put the fully globalized economy as starting in the year 2000 with the admission of China into the World Trade Organization. What this means is that we're looking at economic linkages and flow backs between countries, financial and otherwise, that we've never seen before because they've never been as strong as they have been in the past. And for example, one implication of this is that we've seen recently stock markets in foreign countries going down just like they're going down here in the U.S. The second aspect of this new economy is the fact that we've never seen a contraction in the housing market like we're seeing now. We have had in the past periods of time where the housing market slowed. We've had little tiny dips in housing prices, but nothing like we're seeing now, where by some measures housing prices right now nationally are falling somewhere between 8 percent and 16 percent. So I think that's one reason why this financial crisis that we're in now is so challenging."

Posted by Dave at 08:00 AM

December 01, 2008

Where's the next bubble?

In many ways, we live in a bubble economy. It seems that during each economic cycle, some sector of the economy overextends itself, then sets up the entire economy for a fall. Of course, we call these falls recessions. The housing market was the last sector to have a bubble. Where might the next bubble be?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, this is a very interesting question. You're right about the trends in growth and recession, that many recessions are set up by some sector overextending itself. For example, 20 years ago it was commercial real estate. Ten years ago it was the tech sector, and of course, this time around, it's been residential housing. So many economists are looking beyond the current cycle and saying, 'All right, let's assume we get back to growth, what might set off the next recession?' That is, where might the next bubble be developed? And many economists are saying it's not actually going to be an individual sector. Instead, it may be a country, and they point to the country of China. China, of course, has enjoyed tremendous economic growth during the last 7 to 8 years, but along the way, it has developed an inflation issue. And some worry that the Chinese inflation rate might eventually spark a big plunge in their economy. And if so, since China is now an increasingly important part of the world economy, that could set up a pull back all across the world. So these impacts could certainly be worldwide, and they would probably be negative. Many people might think, well, we'll just pick up the slack here. What China produces, we'll produce. Well, it's not going to work that way. China's both a seller in the world economy as well as a buyer. So the Chinese economy certainly bears watching over the next 5 to 6 years to try to observe if they are developing bubblelike characteristics."

Posted by Dave at 08:00 AM