Housing, Credit Markets Likely To Weaken Economy

Monday, November 19th 2007, 7:06 am
By: News On 6

WASHINGTON (AP) -- The painful collapse of the housing market along with the credit crunch will weigh down economic growth in the final three months of this year and cause economic activity to lag in 2008. It all means that the risk of a recession has increased, economic forecasters say.

The latest look-ahead from the National Association for Business Economics says the gross domestic product is on track to expand at just a 1.5 % pace from October through December. If that proves correct, it would mark a sizable decline from the July-September rate of 3.9 %.

The group's new fourth-quarter projection compared with September's prediction of a 2.5 % growth rate. The GDP – the value of all goods and services produced in the United States — is considered the best barometer of the country's economic fitness. For all of this year, the forecasters expect the economy to grow by 2.1 %, which would be the weakest showing since 2002. Back then, the economy was emerging from a recession and grew by just 1.6 %.

The association downgraded its growth forecast for next year -- putting it at 2.5 %, compared with an earlier projection of 2.8 %.

"While the U.S. economy faces a higher risk of recession from credit markets, housing and energy prices, NABE's panelists still do not see recession as the most likely outcome," said Ellen Hughes-Cromwick, the group's president and chief economist at Ford Motor Co.

Federal Reserve Chairman Ben Bernanke, in a recent congressional appearance, put Wall Street, Main Street and politicians on notice that the economy was in for period of lethargy. He said economic growth would "slow noticeably" in the final quarter of this year and was seen as "remaining sluggish" during the first part of 2008.

In the National Association for Business Economics survey, about three-fifths of the forecasters put the odds of recession starting over the next year at less than one-in-three. About one-in-five sees the risk at greater than 50 %.

"Spillovers from housing weakness to broader consumer spending, along with credit-market tightening, are seen as the most likely recession triggers," the report said.

By a rough rule of thumb, a recession occurs if there are two consecutive quarters when the economy shrinks. The National Bureau of Economic Research, the recognized arbiters for dating recessions, uses a more complicated formula that takes into account such factors as employment and income growth.

At present the overriding worry is that consumers will cut back sharply, sending the economy into a tailspin. The danger is that the severe housing slump, weaker home values and harder-to-get
credit, and other problems could spook consumers.

The Federal Reserve lowered a key interest rate in September by one-half of a %age point, the first cut in more than four years. The Federal Reserve followed with a quarter-point cut in late October, lowering the key rate to 4.5 %. At that time, policymakers hinted that the two cuts may be all that is needed to energize the economy and help it survive the fallout from the troubled housing and credit markets. The Fed's final meeting of the year is Dec. 11.

For the most part, National Bureau of Economic Research forecasters see the Federal Reserve’s key rate staying at 4.5 % through the rest of this year and next year.

But some forecasters said weaker growth or further problems in the credit markets could mean more rate cuts, perhaps to 3.5 % by the end of 2008. Others experts believe the rate could edge up next year to ward off inflation.

Forecasters expect consumer prices to rise 2.8 % this year and then moderate to 2.5 % next year.

The wild card in the outlook is oil prices.

Oil hit a record $98.62 a barrel last week. Gasoline prices have climbed above $3 a gallon. If high oil prices force lots of companies in other industries to raise prices, inflation could spread through the economy. If high energy prices chill consumer spending, it would further chill growth.

National Bureau of Economic Research forecasters, hope the worst is over for oil prices, and predict declines to $75 a barrel and $2.72 a gallon by the end of next year. The survey of 50 forecasters was taken from Oct. 22 through Nov. 6.

Even with the housing and credit problems, employment has stayed in pretty good shape. Forecasters predict the unemployment rate will remain at 4.6 % this year. If that happens, it would match last year's rate, a six-year low. The experts believe the rate will climb to 4.9 % in 2008, still considered low by historical standards.