The US economy grew "nicely" in 2007, and certain areas continue to do well, said Linneman, the Albert Sussman professor of real estate, finance and public policy at the Wharton School of Business at the University of Pennsylvania. Growth will be weak in 2008, with the possibility of recession late this year or early next, he said.
"The economy is growing, but very selectively and very slowly," he said. "This is as much a politically-created slowdown as a capital-markets slowdown."
The longest US presidential campaign in history has also been the most open, with no incumbent in the race, and Republicans looking to distance themselves from the current administration, Linneman said. No one is speaking positively.
"No one is telling you 'Life is great, life is good,' from a political context," Linneman said. "They're all saying, 'You need me to save you.'"
Yet some areas are seeing tremendous growth. "Houston is like Abu Dhabi. Houstonians will tell you that this is the greatest time since the mid 1970s," Linneman said. "Health care, education and accounting services are doing great. And with the exception of Wall Street, we took very little action to reduce the work force."
Capital market disruptions happen regularly, he noted. The current cycle comes at the end of a six-year economic upswing, he said, and most recoveries don't last much longer than six years. In addition, the Federal Reserve increasing interest rates from 1% to 5¼%, while inflation was just 2%, helped ease the way for the markets to "go on strike."
The Fed could take several actions to help the situation, including cutting interest rates to 1% for one year, than raising the rate to 4%, he added. Such a move would recharge the financial system while fighting inflation. The Fed also needs one central voice, rather than allowing all nine members of the board of governors to speak about the economy.
"It's unseemly and unproductive," Linneman said. The real key is to get back to basics, with diligence and real estate skills once again regaining their importance, he says.
"Great wealth has never been created at the peak," Linneman said. "It's lost at the peak. The real challenge of this and any business is to take advantage of this with equity, hard work and patience."
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