With the housing market still in decline and consumers tightening their belts, the economy is likely to slow substantially in the coming year but will skirt an all-out recession. That, at least, is the consensus view of economists polled for msnbc.com’s sixth year-end economic roundtable.
While the 10 forecasters on our panel believe the economy will avoid a recession, much depends on how the Federal Reserve responds, how many more homeowners get swamped by higher mortgage payments and whether oil prices stay below $100 a barrel.
After shrugging off the housing recession over the summer, the economy has showed clear signs of slowing over the past three months. On average the panelists on our roundtable expect the economy to show growth of just 0.6 percent in the current quarter and 1.2 percent in the first quarter.
That feels like slamming on the brakes after surprisingly strong growth of 4.9 percent in the third quarter, a figure that may have reflected an inventory buildup that is unlikely to be completed.
Employers continued to add jobs at a healthy pace in November but are getting more cautious about their hiring plans. Fewer than a quarter of employers say they plan to add jobs in the first quarter of 2008, according to a survey of 14,000 companies by Milwaukee-based global staffing firm Manpower Inc. released earlier this month.
The relatively strong labor market, including continued wage overall gains, has helped blunt the impact of the painful housing downturn. A weaker dollar has helped boost exports. And manufacturers haven’t staffed up as much since the last recession, in 2001, as they have in the past, according to Ed Leamer, forecast director at the UCLA Anderson School of Business.
“We just don’t see the manufacturing sector losing enough jobs for it to be a real recession,” he said.
Because consumer spending makes up some 70 percent of U.S. economic activity, a lot depends on how well household budgets hold up. With home prices stagnant or falling in some areas, many homeowners are no longer able to tap rising equity to fund their spending.
“People are beginning to recognize the wealth gains in the housing market are disappearing,” said Ethan Harris, chief U.S. economist at Lehman Bros. “And with a lag they tend to adjust their spending habits.”
There are signs consumers are already pulling back. Auto sales slumped in November, and some automakers and analysts predict sales in 2008 could drop to their lowest level in a decade. though retail sales were relatively strong in Novermber, it's not clear whether holiday shopping will hold up through December and January.
And with some 2 million homeowners facing higher mortgage payments in the next few years, it remains to be seen how big an impact those higher costs will have on overall consumer spending. The White House this month unveiled a plan to try to head off a rising wave of defaults and foreclosures. Bur critics say it doesn’t go far enough to stem a looming consumer credit crunch.
By freezing adjustable rates for five years, the plan simply postpones the problem that will hit the economy when mortgage rates “reset" to levels that borrowers can’t handle, according to Merrill Lynch chief North American economist David Rosenberg.
“We are far from confident this plan is going to be (an) effective cure for a credit crisis that has now spread far beyond the subprime loan market,” Rosenberg wrote shortly after the plan was announced. “It is now spreading to prime mortgages, commercial real estate, auto finance and credit cards.”
Much of the outlook for slow — but still positive — growth is based on the widely held belief that the Federal Reserve will continue to cut interest rates. All but one of the msnbc.com panelists expect the Fed to lower short-term rates further next year, with the consensus calling for a year-end overnight lending rate of 3.5 percent, down from the current 4.25 percent.
As the problems in the mortgage market have spread to other forms of commercial lending, the credit tightening has put a damper on business expansion.
“A lot more easing is coming,” said Jan Hatzius, Goldman Sachs chief U.S. economist. “We expect a fed funds rate of 3 percent by midyear.”
The other major wild card in the forecast for 2008 is the price of oil. After approaching $100 a barrel in November, prices have fallen back as signs of a U.S. economic slowdown have become more apparent. Slower growth tends to cut into demand, taking some of the pressure off prices. But economic growth outside the U.S. remains relatively strong, supporting continued strong demand for oil.
Any major supply interruption could send oil prices soaring again. That could bring inflation pressure that would leave the Fed in a tough spot. Heading off recession means lowering rates, but fighting inflation requires raising them.
Inflation could also pose a problem if the value of the dollar keeps falling in 2008. A weaker dollar makes imported goods, including oil, more expensive.
So far, the weak dollar and strong growth overseas have helped offset the weakness from the housing recession and the turmoil in the credit markets. With strong demand from rapidly growing economies, U.S. exports have held up well. If global growth remains relatively strong, that could help prop up a weak U.S. economy.
That would be something of a role reversal for what is still the world's largest economy, said Harris.
“We’ve gone from the being the engine of growth to the caboose on the global growth train,” he said. “The U.S. is in some ways the most troubled major economy. The rest of the world is going to take its turn helping us along for a change.”