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Tags: economy | recession

Congress Fears Risk of Economic Relapse

Thursday, 29 October 2009 10:37 AM EDT

Fear that the economy might fall back into recession is compelling Congress to extend unemployment benefits and incentives for homebuying that lawmakers hope will help sustain growth.

The threat of a relapse in housing has prompted Senate leaders to start negotiating an extension of the first-time homebuyers' tax credit, now set to expire Nov. 30. They hope to attach the measure to legislation extending soon-to-expire unemployment benefits and then pass both by the end of the week.

Economists are telling lawmakers that, with unemployment approaching 10 percent, an extension of benefits for the long-term unemployed would help prevent a collapse in consumer spending. In addition, the housing market is seen as a key ingredient of the economic revival.

"Unemployment and housing conditions could face further deterioration" without further actions by Congress, said Frank Lee, an economic analyst with CreditSights Inc. He said that millions of people who lost jobs in the worst of the economic crisis a year ago are getting close to the end of their 79 weeks of unemployment benefits.

"As unemployment benefits are exhausted, we are concerned that those who remain jobless and own a home will be subject to foreclosure risk," further imperiling the housing market, he said. And already the housing market is showing signs of retreating as builders put off construction plans.

"Double-dip fears are returning," said Richard Berner, chief economist at Morgan Stanley, referring to the possibility of the economy reversing course after a short period of growth.

Stimulus provisions enacted earlier this year induced a surge in auto and housing sales that likely produced robust growth of between 3.5 percent and 4 percent in the summer quarter.

But Mr. Berner said the sudden end of the popular federal programs, including the cash-for-clunkers auto trade-in program as well as the housing tax credit, will cause growth to flop again in the current quarter and be "bumpy" at best next year. Whether the economy pulls through will depend on whether Congress and the Federal Reserve continue to support growth, he said.

A report on Thursday is expected to show the economy surged out of recession in the summer quarter, thanks in large part to a jump in auto production and sales produced by the clunkers program and a rise in homebuilding and home sales inspired by the $8,000 first-time homebuyers tax credit.

But auto and retail sales cratered last month after the clunkers program expired, and many economists expect the housing market to take a dive just like the auto market's when the housing credit expires. They say the economy would take an even further turn for the worse if Congress does not extend aid to the nearly 4 million unemployed people who have been out of work for six months or more and depend on federal jobless benefits to pay their bills.

Worries about jobs caused an unexpected decline in consumer confidence in a report Tuesday from the Conference Board, with consumers' assessment of current economic conditions falling to its lowest level in 25 years. The report showed that consumers remain shaky, unconvinced about talk of a recovery, and strapped for cash in the wake of the long recession.

The White House has called for an extension of emergency unemployment benefits and the House has passed a bill providing another 13 weeks to people in states with unemployment rates higher than 8.5 percent. A bill offering up to 20 weeks of extra benefits is languishing under a Republican filibuster in the Senate.

Action on the housing credit has been delayed for weeks by concerns among some congressional leaders about its cost. One Senate proposal extending the credit through June and expanding it to all homebuyers would add about $17 billion to the budget deficit. Another would add only marginally to the deficit by extending the credit only for first-time buyers for four months, and then phasing it out over nine months.

Apparently out of concern about costs, Housing and Urban Development Secretary Shaun Donovan was ambivalent about the credit when asked last week if it should be extended.

After a meeting with economists last week, House Speaker Nancy Pelosi, California Democrat, said the House would take more action, including possibly extending a measure that helps unemployed people pay for health insurance. She said Democratic leaders also are considering expanding the housing tax credit to anyone who buys a home and maintaining higher loan limits for federally backed mortgages.

Moody's Economy.com, a Pennsylvania forecasting group whose founder, Mark Zandi, met with Ms. Pelosi, advocates an expansion of the housing tax credit to all buyers to prevent home sales from foundering again.

"The summer home-sales season was a welcome success" because of the credit, said Moody's economist Joseph Brusuelas. "Further support is necessary to keep housing from sliding back again."

Adam G. York, economist with Wells Fargo Securities, expects home sales to collapse by December if the credit isn't extended.

Allen Sinai, president of Decision Economics, sees a one in five chance of a "double-dip" recession as huge job losses and the shattered incomes of consumers create the conditions for the "mother of all jobless recoveries."

"Anemic" growth will spawn even more job losses despite Congress' stimulus efforts, he said. But the pressure will be on Congress to act, and its response will be "critical" in determining whether the expansion continues, he said.

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Fear that the economy might fall back into recession is compelling Congress to extend unemployment benefits and incentives for homebuying that lawmakers hope will help sustain growth. The threat of a relapse in housing has prompted Senate leaders to start negotiating an...
Thursday, 29 October 2009 10:37 AM
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