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Top economist sees increased odds of double-dip recession

August 25, 2010

An economist who advised Democrats on the $787 billion stimulus has increased his prediction of the odds of the economy entering a double-dip recession.

Mark Zandi, the chief economist of Moody’s Analytics, pegged the chances of a second recession at one in three. Just a few weeks ago, he saw only a 20 percent chance of another economic slowdown.

“I don’t think we’ll double-dip, but it will be a close call,” Zandi told reporters Tuesday at a breakfast sponsored by the Christian Science Monitor.

He cited weak consumer confidence, nervous businesses and investors, and plummeting home sales to explain the gloomier outlook.

Zandi, who has advised both political parties on the economy, spoke one day after the National Realtors reported sales of previously owned homes fell in July by 27.2 percent. The housing report was much worse than analysts had expected, and it fueled a drop in stocks on Tuesday.

The negative news on the housing front followed a jump in unemployment claims last week. On Friday, the Commerce Department is expected to announce that the economy grew at a slower pace than expected in the second quarter.

The faltering economic recovery is bad news for Democrats, who are headed into a midterm election that could tilt the House and Senate back to the GOP. House Republican leader John Boehner (Ohio) on Tuesday hammered President Obama’s policies and called on him to fire his economic team.

Zandi said there is little that can be done to ease the economy’s woes in the near term, partly because of political differences in Washington. He also said it would not be surprising if unemployment rose ahead of November.

He said one thing Congress and the White House could do to boost confidence in the economy would be to reach a compromise on looming tax increases that would delay any tax hikes until at least 2012. He said it would be a gamble to let tax rates rise on the wealthy, as proposed by the Obama administration.

“Raising taxes on upper-income households, I think we’d still avoid recession,” Zandi said, “but the odds would rise.”

Zandi has made his position on the tax cuts clear to both parties. He wrote an op-ed in The New York Times earlier this month arguing that Obama’s plan to eliminate tax breaks for the wealthy would be an unnecessary gamble.

Zandi urged both parties to reach a middle ground in which tax rates would remain stable in 2011. He suggested higher tax rates on couples earning more than $250,000 and individuals earning more than $200,000 could be phased in when the economy recovers, possibly by 2012.

Boehner and most Republicans want all of the tax breaks to be made permanent.

Zandi blames the European debt crisis and the effect it had on the U.S. stock market for much of the economic problems. Without that crisis, Zandi said the U.S. might have already reached a self-sustained recovery.

He also said Congress should have more quickly extended unemployment insurance benefits that were approved in early August. Because of the delay, millions temporarily lost unemployment benefits at a critical time for the economy, he said.

Businesses that survived the recession are skittish about hiring or investing in their companies, but are healthy and sitting on capital. Zandi said this underlying strength is a major reason why he does not believe the economy will double-dip.