John's Economic Forecasts
The Economy in 2008:
By Dr. John A. Tuccillo
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This year—2008—has begun with the general recognition that the United States economy is weak and getting weaker. The downturn in the real estate sector, intensified by increasing numbers of foreclosures, has rippled through other sectors of the economy both here and abroad. As construction has declined, employment has fallen, building supply companies have seen their revenues shrink, and financial companies have come under stress. Investors in mortgage-backed securities have seen their investments turn sour. The net has been weak employment and GDP growth.
By Dr. John A. Tuccillo
<<pdf of article>>
<<view the numbers>>
This year—2008—has begun with the general recognition that the United States economy is weak and getting weaker. The downturn in the real estate sector, intensified by increasing numbers of foreclosures, has rippled through other sectors of the economy both here and abroad. As construction has declined, employment has fallen, building supply companies have seen their revenues shrink, and financial companies have come under stress. Investors in mortgage-backed securities have seen their investments turn sour. The net has been weak employment and GDP growth.
2008 Forecast
The Problem
The problem is this. The only thing driving growth during the first part of the century was real estate and that hit the skids in 2005. Nothing has replaced it. We’ve sent all our manufacturing abroad, and our edge in technology has been blunted by our post-9/11 paranoia about letting foreigners live and work here. In a normal cyclical expansion, different sectors of the economy take turns leading growth. In this cycle, nothing stood up when real estate stood down. It is ironic that the Bush recession of 1991 is being echoed in a Bush “recession” of 2008.
I would argue that the economy is heading into recession. Now it may not meet the official definition (two consecutive quarters of economic contraction) but compared to the booming economies of the rest of the world, we are in recession. But this is not new; the economy has been underperforming since emerging from the short and mild recession of 2000-2001. Corporate profits have risen, but not corporate investment. As a result, job growth has been insufficient to keep up with growth in the labor force. The numbers that stunned the stock market in early January (that the December unemployment rate jumped as the economy was creating only 16,000 jobs) are typically of what has been happening regularly in the labor market. In addition, those with jobs increasingly found those jobs paying less, as benefits were cut or employee contributions increased.
Looking ahead, we see an economy that will improve, but not by much and not for a while. The odds are—barely—that we will skirt a technical recession. Growth will remain positive but unacceptably low with continued sluggish employment growth (see accompanying table) through 2008. Home sales will stop their decline by the end of the year, but will not resume a “normal” growth path until 2009. Prices lag sales and will continue to decline through the end of the year. There will be, however, a significant shift in housing markets in 2008. We will go from a national downturn (affecting virtually all local markets) to local markets with differing conditions. Some areas have taken their full hit and will show signs of recovery in 2008; some markets were only brushed by the national downturn and will resume a normal sales and price pattern in 2008. Other markets will remain stagnant, weighted down by excess inventories of newly built homes.
The wild card in all this is inflation. Higher oil prices and a falling dollar will push inflation up. Oil is a cost component of a majority of the product we consume and their prices will rise as the increasing price of oil works its way through the supply chain. Imported manufactures will cost more as the dollar buys less of foreign currencies. On top of this, economic stimulus measures that the Fed is already taking (by lowering the Federal Funds rate) and the administration and Congress are mulling will eventually push prices up even higher. With no driver of growth on the horizon, this will cause us to flirt with stagflation (low growth and high inflation).
Recessions are a natural part of economic cycles. Given the demographic profile of the United States, most recessions will be short and mild, like the last two (1991-2 and 2000-01). Recessions become severe when economic policy makers attempt to defer the pain of a downturn. Right now, it looks like the economy will be just fine by 2009 if Washington leaves its hands off. Economic stimulus in the face of a short, mild recession is simply a bad idea.
<<pdf of article>>
<<view the numbers>>
The problem is this. The only thing driving growth during the first part of the century was real estate and that hit the skids in 2005. Nothing has replaced it. We’ve sent all our manufacturing abroad, and our edge in technology has been blunted by our post-9/11 paranoia about letting foreigners live and work here. In a normal cyclical expansion, different sectors of the economy take turns leading growth. In this cycle, nothing stood up when real estate stood down. It is ironic that the Bush recession of 1991 is being echoed in a Bush “recession” of 2008.
I would argue that the economy is heading into recession. Now it may not meet the official definition (two consecutive quarters of economic contraction) but compared to the booming economies of the rest of the world, we are in recession. But this is not new; the economy has been underperforming since emerging from the short and mild recession of 2000-2001. Corporate profits have risen, but not corporate investment. As a result, job growth has been insufficient to keep up with growth in the labor force. The numbers that stunned the stock market in early January (that the December unemployment rate jumped as the economy was creating only 16,000 jobs) are typically of what has been happening regularly in the labor market. In addition, those with jobs increasingly found those jobs paying less, as benefits were cut or employee contributions increased.
Looking ahead, we see an economy that will improve, but not by much and not for a while. The odds are—barely—that we will skirt a technical recession. Growth will remain positive but unacceptably low with continued sluggish employment growth (see accompanying table) through 2008. Home sales will stop their decline by the end of the year, but will not resume a “normal” growth path until 2009. Prices lag sales and will continue to decline through the end of the year. There will be, however, a significant shift in housing markets in 2008. We will go from a national downturn (affecting virtually all local markets) to local markets with differing conditions. Some areas have taken their full hit and will show signs of recovery in 2008; some markets were only brushed by the national downturn and will resume a normal sales and price pattern in 2008. Other markets will remain stagnant, weighted down by excess inventories of newly built homes.
The wild card in all this is inflation. Higher oil prices and a falling dollar will push inflation up. Oil is a cost component of a majority of the product we consume and their prices will rise as the increasing price of oil works its way through the supply chain. Imported manufactures will cost more as the dollar buys less of foreign currencies. On top of this, economic stimulus measures that the Fed is already taking (by lowering the Federal Funds rate) and the administration and Congress are mulling will eventually push prices up even higher. With no driver of growth on the horizon, this will cause us to flirt with stagflation (low growth and high inflation).
Recessions are a natural part of economic cycles. Given the demographic profile of the United States, most recessions will be short and mild, like the last two (1991-2 and 2000-01). Recessions become severe when economic policy makers attempt to defer the pain of a downturn. Right now, it looks like the economy will be just fine by 2009 if Washington leaves its hands off. Economic stimulus in the face of a short, mild recession is simply a bad idea.
<<pdf of article>>
<<view the numbers>>
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