WASHINGTON -- The fear and hysteria that gripped financial markets last week was, in Yogi Berra's legendary words, deja vu all over again.
The decline in the housing market and the troubled subprime-mortgage industry has been hanging over the U.S. economy for more than a year now, but with little impact on its fundamentals. Yet it keeps flaring like a bad virus - periodically striking Wall Street with body aches, chills and fever until the illness runs its course.
A recent flare-up occurred in August, at the end of a strong run-up in the stock market, sending the Dow Jones Industrial Average below 13,000. However, it wasn't long before Wall Street recognized that the sun was going to come up the next day, businesses would still be open and people would be going to work -- and the market resumed its upward climb, heading toward 14,000 once more. While Wall Street was calling in sick, no one had told the U.S. economy that it should be feeling just as ill. Instead, it grew by an astounding 3.9 percent annually and was hurtling toward its 50th consecutive month of uninterrupted job growth and continued full employment.
But the financial bellyachers who always see a recession just around the corner were back again last week, warning that the economy was in bad shape and that we were about to plunge into a recession -- really.
This time, though, it wasn't just the housing and credit crunch disturbing the worrywarts. Oil was spiraling toward $100 a barrel; the dollar was falling in overseas currency markets; and several financial giants that had invested heavily in subprime paper were in the hole by billions of dollars.
All of that, fed by a hyperventilating financial news media, sent the stock market into a sell-off swoon last week and the Dow plunged below 13,000 as of Monday.
But as the markets settled down this week, things did not look quite as gloomy as the week before. By Tuesday, the dollar was showing tentative strength again. The price of a barrel of oil fell from its lofty level on the news that Saudi Arabia was about to increase its production in order to bring prices down a bit. And bargain hunters (many of the same people who drove down stock prices) were buying back the stock they had sold the week before.
Consumer confidence has plunged during this period, largely driven by the relentlessly negative way economic news is reported to them. Much of this insecurity is based on beliefs that are not true.
Perhaps the biggest myth held by the vast majority of Americans is that the United States "doesn't make much of anything anymore" -- that everything is now made in China. This belief is perpetuated because they, like me, shop at Wal-Mart, which has made much of its fortune by selling low-end merchandise made in China.
There's nothing wrong with that, by the way. When consumers can save money on what they buy, it means they have more left over to buy other things.
But how many Americans know that last year the United States sold a record $1.4 trillion in made-in-America exports, up by 12.7 percent from the year before? These exports generated 45 percent of this country's phenomenal third-quarter economic growth.
Another reason to feel good about the economy is its resilience. At $14 trillion a year and growing, it's capable of absorbing a lot of body blows and keep on ticking.
"This is an extremely resilient economy," says Ed Lazear, who chairs the President's Council of Economic Advisers. "It is really quite remarkable that during a quarter when we had housing-market issues, when we had a credit situation in the beginning of August, despite that, we still ended up with nearly 4 percent growth following another quarter where we had nearly 4 percent growth."
Clearly, the housing market is the economy's weakest sector right now, but it remains to be seen whether it will bring down the rest of the U.S. economy. My sense, based on all the other growth fundamentals, is that it will not. The mortgage-industry association reports that 95 percent of all of the country's mortgages are being paid on time.
Oil prices and higher gasoline and heating-oil prices that descend from them are also a concern. But so far the economy has been able to "shrug off higher oil prices primarily through gains in productivity growth and through expansions into other sectors," Lazear says.
What we need to be concerned about is the tax bill that the Democrats in the House are cooking up and their plans to let the Bush tax cuts expire, which would mean higher tax rates for virtually everyone in 2011.
That would abruptly end the economic growth we've experienced since the tax cuts of 2001 got this economy moving again.