Plagued by a housing bubble, the collapse of the subprime lending market, high energy costs, record national debt, a record trade deficit, two war fronts and now rising unemployment and maybe inflation, the U.S. economy is teetering on the brink of recession, and 2008 will be a year of contraction.
That is the consensus outlook of several economists polled by Small Business Times for the Northern Trust Economic Trends Breakfast.
Paul Kasriel, director of economic research, at Northern Trust Bank in Chicago
“What is the probability that the U.S. economy will fall into a recession in 2008? We would answer, 65.5 percent … What we do see for 2008 is an economy teetering on the brink of recession.”
Kasriel says a popular misconception is that a recession occurs when real gross domestic product (GDP) contracts for two or more consecutive quarters. The actual criterion for defining a recession used by the National Bureau of Economic Research (NBER) requires a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales, Kasriel said.
Regardless of the technical definition, 2008 will not be a joyful year for the U.S. economy, according to Michael Knetter, economist and dean of the University of Wisconsin School of Business in Madison (see accompanying interview).
Most local and national economists surveyed or tracked by SBT concur.
Bruce Bittles, director of investment strategy, Robert W. Baird & Co. Inc., Milwaukee
“The U.S. economy is slowing and is faced with a high probability of falling into recession due to the most difficult housing downturn in the last 80 years. The outlook is made more complicated by unknowns in the credit markets which make evaluating the full nature of the level of risk to the financial system very difficult. Consumer spending, which remained remarkably strong earlier in (2007), is showing signs of caving due to the stress associated with deteriorating home prices. In a debt-based economy consumers depend heavily on asset performance, which for most are home values and the performance of 401(K) retirement accounts. The growth rate of GDP is anticipated to slow to 1.5 percent to 2.0 percent in 2008 … Consumer spending is expected to grind lower as pressure on home values and slim wage gains take a toll on confidence and disposable income. Business spending is likely to follow the path of earnings and show very small year-over-year gains.”
Michael Sadoff, investment advisor and principal at Sadoff Investment Management LLC, Milwaukee
“I would put the likelihood of a recession at around 50 percent. The economy will definitely be slower going into the early part of 2008, with a possibility to strengthen depending on the actions of the Federal Reserve Board. Right now, the economy is teetering on the brink of a recession. Nearly all slowdowns in the economy and all major stock market declines have been led by the Federal Reserve Board raising short-term interest rates (although not every rise in short-term rates has led to a major decline). Starting in 2004 the Fed raised rates from 1percent to 5.25percent, which has caused the current economic slowdown. Another main factor in the slowing economy is the unwinding of the housing bubble. In the past few months, the Fed has now attempted to come to the rescue. They have lowered the Federal Funds rate by 1 percent down to 4.25 percent. Typically the Fed easing causes the economy to improve six to nine months later, and the stock market sees this in advance and starts to rise in advance of the economy. There are two time periods in the United States when the stimulus from lower interest rates did not take: During the Great Depression and in 2001-2002. In a nutshell, if this cycle is typical, the Fed will continue to ease, the stock market will rise and the economy will bottom around mid- to late 2008. It is possible that the housing bubble combined with the credit crunch along with a Fed that may not ease fast enough (due to their fears of inflation) could cause this cycle to be another exception … Even though the economy might avoid a recession, it is highly unlikely that the housing problems will end in 2008.”
Nariman Behravesh, chief economist for Global Insight
‘The U.S. economy is now in the danger zone. Even a small shock will push the economy over the edge.”
David Rosenberg, chief North American economist for Merrill Lynch
“(The most recent) employment report confirmed our suspicions that the economy was transitioning into an official recession towards the end of last year … At no time in the past 60 years has the unemployment rate risen 60 basis points (50 bps is the actual cutoff) from the cycle low without the economy slipping into recession, and here we now have the jobless rate hitting 5 percent in December vs. the March/07 trough of 4.4 percent … In sum, the recent employment report strongly suggests that an official recession has arrived.”
Richard Berner and David Greenlaw, economists for Morgan Stanley
“Incoming data suggest that tighter credit has pushed the US economy to the brink, and we reiterate our call for a mild U.S. recession in the first half of 2008. Weak employment data and slowing in export orders reported by purchasing managers undermine the case that a healthy consumer and strong global growth would forestall a downturn. Moreover, the ongoing housing recession is deepening, declines in capital goods bookings hint that business equipment spending will contract, and inventory liquidation seems likely. Our headline growth forecast for 2008 is unchanged at 1.1 percent using year-on-year arithmetic, but that largely reflects a stronger-than-expected 4Q07 … Most of the weakness is concentrated in the first half of the year … The key question now is how deep the recession will be and how long it will last.”
Stephen Roach, Morgan Stanley Asia chairman
The U.S. real estate market has become “the world’s biggest bubble,” and “the U.S. consumer is toast.”
When assessing the economy, Peter Morici, professor at the University of Maryland School Business and former chief economist at the U.S. International Trade Commission, does not hesitate to point fingers.
“Longer-term, persistent U.S. trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend at least three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor. Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year,” Morici said. “Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10,000 per worker. The damage grows larger each month, as the Bush administration dallies and ignores the corrosive consequences of the trade deficit.”
Indeed, a receding U.S. economy is certain to have political ramifications for the presidential election in November.
The latest Reuters/Zogby Index indicates that most Americans (67 percent) believe the United States is on the wrong track, and just one in four believe the nation is headed in the right direction.
Of course, every economic projection has a contrarian or two. In the Milwaukee area, that contrarian is Clare Zempel, economist and founder of Zempel Strategic Applied Economics and Financial Market Analysis in Fox Point
“The odds that a recession is imminent and inevitable may well be overstated in the media,” Zempel told SBT.
Zempel noted that the “Anxious Index” survey of professional economic forecasters said only 22.5 percent of them predict that real GDP will decline in the first quarter.
“This is well above zero but well below the close to 50-percent chance touted in the media in recent weeks. Another point about recession forecasts is that the record has been quite poor,” Zempel said. “If a recession were imminent, then weekly initial unemployment insurance claims should have soared. Claims have drifted higher but not soared in recent weeks and months (the latest number was a two-month low). If a recession were imminent, then commodities prices should have collapsed, but this has not happened. If a recession were imminent, then more than 10 states should be suffering declines in employment and real-wage tends. The latest reading is that 44 states are still in upward trends.”
Of course, only time will tell.
