Moody's Mark Zandi: 'We dug ourselves a very deep hole, and it will take time dig out of it'

ONLY ON THE BLOG: Answering today’s six OFF-SET questions is Mark Zandi, chief economist of Moody's Analytics, where he directs research and consulting. Moody's Analytics, a subsidiary of Moody's Corporation, is a leading provider of economic research, data and analytical tools.

His recent research has focused on the determinants of mortgage foreclosure and personal bankruptcy, analyzed the economic impact of various tax and government spending policies, and assessed the appropriate policy response to bubbles in asset markets. He is author of “Financial Shock,” an exposé of the financial crisis. His forthcoming book, “Paying the Price,” provides a roadmap for meeting the nation's daunting fiscal challenges.

Dr. Zandi received his PhD at the University of Pennsylvania, where he did his research with Gerard Adams and Nobel laureate Lawrence Klein, and received his B.S. from the Wharton School at the University of Pennsylvania.

Friday morning, the Department of labor released May’s employment report and the news isn’t great. The economy gained a mere 54,000 jobs in the month, a significant slowdown from 232,000 jobs added to payrolls in April. What‘s happening?

The sharp slowing in job growth this spring is largely due to the impact of the surge in gasoline and food prices, fallout from the Japanese catastrophe on U.S. manufacturers, and the resumption of house price declines resulting from the ongoing foreclosure crisis. The impact of these factors on jobs is being magnified by the very fragile collective psyche. Everyone has been through a lot in recent years and it doesn’t take much to push us over the proverbial edge.

President Obama, members of Congress, declared candidates for the 2012 election relentlessly talk about the need for more jobs. Unless the government creates more jobs—unlikely in this time of budget cutting—where will hundreds of thousands of jobs so desperately needed come from?

I expect job growth will reaccelerate later this fall. U.S.companies are very profitable and their balance sheets are about as strong as they have ever been; it is not a question of whether businesses can hire more it is a question of their willingness.

Assuming oil prices don’t spike higher again and policymakers don’t misstep with regard to raising the debt ceiling limit, then I think businesses will slowly get their groove back and pick-up their hiring. The job gains will be broad-based across industries, including manufacturing, transportation and distribution, professional services, healthcare, retailing and leisure and hospitality.

Republicans in Congress are demanding deep spending cuts in return for raising the $14.3 trillion U.S. debt ceiling, something the administration says must happen by early August. From your point of view, how important is this battle to Americans who are worried about their mortgages, their jobs and sending their kids to college? Do you think the debt limit should be raised?

It is absolutely vital for Congress and the Administration to come to terms and to raise the debt limit in the next few weeks. If they don’t do this by late July, then stock and bond markets will weaken, and if they don’t by early August, the economy will be thrown into another recession.  Our fiscal problems will quickly become even worse. I am hopeful policymakers will be able to work this out soon, but with each passing day I grow more worried that I am wrong.

And I’m not the only one.  Investors and the rating agencies are signaling their growing angst over the process.

(Editor's Note: Moody's put Congress on notice Thursday, CNNMoney reports, warning that it will review the United States for a downgrade if it doesn't see progress on raising the debt ceiling. The rating agency blamed fractious politicians for failing to address the unsustainable U.S. debt position. Public debt now exceeds 60% of annual economic output and is growing at a good clip thanks to trillion-dollar-plus budget deficits.

Moody's said the political standoff raises the risk that the government will do nothing to put itself on firmer financial footing between now and next year's presidential elections – which would push the United States another step toward the long feared loss of its triple-A rating.)

Last month, in one of your special reports, “To Shore Up the Recovery, Help Housing,” you wrote, “The gloom in the housing and mortgage markets notwithstanding, there are reasons to be optimistic that housing’s long slide will come to an end soon.” Please give us some hope—why are you optimistic?

Yes, there are some reasons to be optimistic that the wrongs in the housing market are being righted. There are still millions of foreclosed properties to work through, but we are working through them and delinquency rates on mortgages  – which presage future foreclosures – are falling quickly.

Given the current historically low level of homebuilding, significant progress is also being made working down the large overhang of vacant homes. These problems won’t be solved this month or next, but by this time next year I do expect the housing crash to be over.

What advice would you give to middle class Americans right now? Are there any actions that people can take right now to get through all of this?

Be prudent in your financial affairs, but don’t be scared. Times are difficult, but they will get better. They always have.  Anyone has bet against the American economy for very long has lost that bet.

How concerned are you that the United States may soon face another recession?

Another recession remains unlikely, despite the spring economic slowdown and the risks posed by higher gasoline and food prices and the debt ceiling debate.

U.S. businesses are in very good financial shape, the financial system is on sounder ground, and households are rapidly reducing their debt loads. The economy isn’t moving in a straight line, it never does, but it is generally moving in the right direction.  With a bit of luck and some reasonably good policymaking, we will feel better a year from now. 

Having said all of this, we won’t feel really good for a number of years.  We dug ourselves a very deep hole, and it will take time dig out of it.