Will there be a US recession in 2007?

President Bush launched a concerted PR offensive last weekend to talk up the US economy, said Edmund Andrews in The New York Times. In response to complaints from his own party that he has been too shy about claiming credit for America's above-trend growth, Bush sent two dozen administration officials out across America to promote the Republican record.

"The American economy heads into 2006 with a full head of steam," claimed the president, citing data on jobs, productivity and home ownership and demanding that Congress extends his major tax cuts on dividends, capital gains and estate taxes, as well as wages. And, on the face of it, things look pretty good for the US economy. Last year, GDP grew by about 3.6% the fourth consecutive year of growth since the short 2001 dip. What's more, it managed to weather the disruption caused by Hurricane Katrina and high energy prices with apparent ease.

Yet most Americans don't believe that these are good times at all, said Joel Havemann in the Los Angeles Times. "Polls show that more than half of the public thinks the economy is in bad shape and that Bush is doing a bad job of managing it."

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Indeed, one recent survey show that 30% of the population thinks the US is in a recession. They may be wrong about that for the time being, but they are right to be worried for two main reasons.

First, for the bulk of the working population earnings are not keeping up with inflation, while soaring healthcare bills and energy costs are "draining cash from wallets". And second, Americans have chosen to make up for the shortfall in recent years by borrowing against the value of their homes. Indeed, spending has exceeded after-tax income for the last six months. "But now the housing market appears to be cooling, potentially cutting off this source of cash."

What is happening, said Stephen Roach in a Morgan Stanley paper, is that "America's once-mighty job machine is struggling as never before". It's not so much the headline figure: a 4.9% unemployment rate does not look too scary. The scary stuff is what the politicians don't tell you, or deliberately obscure that these "subpar" new jobs are mostly low-wage and temporary, and that wages overall are falling in real terms. With incomes falling, Americans have been all too keen to embrace the "asset economy" of rising house prices.

But "if the housing market softens and financing costs rise both quite likely, in my view" equity extraction from houses will fall off, and people will return to spending what they actually earn. Such a transition "undoubtedly spells slower consumption and real GDP growth over the foreseeable future".

Indeed, if you believe the financier George Soros, it spells big trouble, said Ambrose Evan-Pritchard in The Daily Telegraph. Soros thinks US interest rates will peak this spring at 4.75%, but that the time-lag inherent in monetary tightening means the full effect of all the rises (from 1% in June 2004 to 4.25% now) will not be clear for months. As a result, the Federal Reserve looks set to raise rates more than is needed to curb inflation part of the almost inevitable overshooting that policymakers are prone to.

"Right now, the markets are as good as you could ask for", said Soros. But expect slower US growth and a weaker dollar this year, hurting European exports and also China. Moreover, "if housing continues to cool while rates are slowing then it could turn into a hard landing. That's why I expect a recession to happen in 2007."