Tuesday, March 11, 2008

Prolonged US Housing Woes Seen But No Recession

Economic Forecast Sees Prolonged Housing Woes but No Recession in 2008.

The U.S. economy will suffer as the slumping housing market eats away at job creation and consumer spending, but the nation should avoid slipping into a recession this year, according to a new economic report.

A recession could still happen though, if the credit crisis that has stifled the housing market deepens, preventing consumers from buying big-ticket items like cars and businesses from spending on equipment, according to the quarterly Anderson Forecast by the University of California at Los Angeles.

"We don't see that happening," said Edward Leamer, director and co-author of the forecast released Tuesday. "This is a tough call, but I will be very surprised if this thing actually precipitates into recession."

The forecast anticipates job growth remaining sluggish in 2008, with the U.S. unemployment rate rising to 5.5 percent by the end of the year. The February rate was 4.8 percent. The forecast expects the economy to post gross domestic product growth of about 1.5 percent this year, rising to about 3 percent growth in 2009. GDP grew 2.2 percent in 2007, the weakest showing in five years.

The no-recession forecast runs counter to the outlook among many economists and financial pundits, who contend the economy has already started to shrink amid rising unemployment, job losses, record oil prices, and the lingering effects of the housing and credit crises.

The U.S. lost 63,000 payroll jobs last month, the second consecutive month of job losses. The last time the U.S. posted a two-month drop in payroll jobs was in 2003, when employers were still struggling through the aftermath of the 2001 recession.

Leamer said the nation may be experiencing negative economic growth in the current quarter. Economists generally look for at least two consecutive quarters of negative growth before they make a recession determination.

The biggest risk of recession comes from the credit crisis that emerged last year as home values began to tumble and the number of mortgage defaults and foreclosures soared, the economist said. Major financial institutions were racked by credit losses as the value of securities backed by mortgages sank, causing the traditional outlet through which banks borrow money to seize up.

The credit woes have deepened the housing slump, making it harder for would-be homeowners to borrow money and for homeowners to refinance. But consumer spending, while weakened, hasn't declined severely due to credit problems, Leamer notes.

"Americans are not as wealthy as they thought they were, and that's going to factor into consumer spending going forward, but it doesn't cause a recession because consumers all realize their lack of wealth at different points in time," he said.

Another potential factor in a recession would be widespread job losses. Leamer, who has maintained a no-recession forecast in recent quarters, said that's not likely. "So far the labor markets are slowing but not collapsing," he said. The forecast calls for the nation's housing doldrums to continue "for a long time," Leamer said. He expects housing starts, which fell from a high of 2.3 million units in January 2006 to 1 million units this January, to bottom out in the summer.

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