Economy to remain sluggish through end of ’08, economist says

The nation’s economic slump may ease somewhat, but will not see full-scale recovery during the second half of the year, according to an economist with First Business Bank.

The nation’s economic slump may ease somewhat, but will not see full-scale recovery during the second half of the year, according to the third quarter market review by Dr. Abdur Chowdhury, chief economist of Capital Market Consultants LLC and First Business Bank Consulting Economist. First Business Financial Services, headquartered in Madison, operates several financial services firms, including First Business Bank-Milwaukee, First Business Bank-Madison and First Business Bank-Northeast.

Weak consumer spending, slower corporate earnings, a tighter credit market and lower capital spending will continue for the rest of the year, the report says. Strong government spending and demand for exports are expected to continue. Energy prices should stabilize and may lower. And interest rates will likely remain where they are.

"Given sluggish growth, a soft labor market, ongoing credit stress and a lack of broad inflationary pressure, neither the credit markets nor the economy warrant an interest rate hike this year," Chowdury’s report states. "In the meantime, however, the Fed will continue to use its special lending mechanisms, meaning that easy monetary conditions are likely to persist."

The stock market has struggled in the first half of 2008, Chowdhury reports, and certain sectors of the market could already be discounting prices because of potential recession in early 2009. However, small cap stocks such as those contained in the Russell 2000 Index may be pointing to a recovering market.

"Historically, a small stock rally during an economic slowdown has often foreshadowed better times ahead," Chowdhury writes. "Not only are small stocks doing better, but the most economically sensitive small-cap sectors, e.g., energy stocks, have performed best of late." The yield curve, which was inverted in 2007, has turned to a more normal model, the report states, which may also point to an economic recovery.

"Today, the yield curve is sloped normally, with 10-year Treasury Bonds paying substantially more than 2-year notes," the report states. "This typically signals an economic turnaround ahead."

www.firstbusiness.com

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