US Economy May Escape Recession in 2008
The odds of a recession in the US economy have risen to even, and even if there is no recession officially, it will feel like a recession to most Americans, according to Standard & Poors. Still, S&P Chief Economist David Wyss predicts a bumpy landing but no recession.
Housing problems have taken most of the attention in the media so far, but housing alone is unlikely to cause a recession, Wyss writes in U.S. Economic Forecast: Fasten Your Seatbelts, It’s Going To Be A Bumpy Year.
But only if the downturn extends beyond housing is a recession likely.
The drag from the housing sector has been fully offset by two other sectors: foreign trade and capital spending. Over the past four quarters, the improvement in the real trade deficit has added 0.45 percentage point to real GDP growth, offsetting nearly half of the housing drag, Wyss writes. “We expect this to continue in 2008, as a weaker dollar and still-strong foreign economic growth help exports, while imports continue to slow because of weaker U.S. demand. The danger is that the foreign economies may weaken more than expected. Europe and Japan have both relied on trade surpluses to offset soft domestic demand.”
Nonresidential construction expenditures are expected to flatten out in 2008, as slowing employment growth reduces the need for office space and weaker consumer spending slows retail construction, S&P says. The 2007 surge in highway construction will also slow in 2008.
So far, except for housing-related sectors such as furniture and building materials, consumer spending has held up much better than expected. Wyss believes that consumers will cool off in 2008, however, because of higher oil prices and falling home prices. In addition, a rising unemployment rate will cut into consumer confidence.
Whether the economy will be soft enough to count as a recession will depend on how much purchasing power is sucked away by higher energy costs and on how pervasive the damage is to capital markets, Wyss concludes.
Our belief is that this will be a bumpy landing, but not a recession.
S&P’s full economic forecast can be purchased here.
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January 10th, 2008 at 1:15 pm
[...] & Poors also says the odds of a US recession have risen to even, and in any case, if there is no recession officially, it will still feel like one to most [...]