U.S. economic growth is expected to slow to a crawl in the first half of 2008, according to Ellen Hughes-Cromwick, president of the National Assocation for Business Economics and chief economist at Ford Motor Company. “While a slight majority of our panel of forecasters expects the economy to avoid a recession in 2008, growth is expected to average just 0.75% before accelerating in the second half in response to fiscal and monetary stimulus.”
Highlights
• The NABE panel expects little economic growth in the first half of 2008, but anticipates a significant pickup in the second half. The economists surveyed look for real GDP, which grew at just a 0.6% annualized rate in the fourth quarter of 2007, to grow at a scant 0.4% rate in the first quarter of 2008, with 1% growth expected in the second quarter. Some 45% of our panel believes that a recession will have occurred by the end of this year, although a majority of those believe the downturn will be relatively muted. (See special questions below). Fiscal and monetary stimulus is expected to boost growth in the second half to a 2.8% annual rate, bringing growth for the year to 1.8% (on a fourth-quarter-to-fourth-quarter basis). This forecast is down significantly from the 2.6% growth projected in November. The 2009 outlook, shown for the first time, calls for real GDP to grow 2.9% over the course of the year.
• The panel significantly trimmed its estimates for consumer spending and housing, as well as cutting the outlook for inventory accumulation, while raising its forecasts for net exports and government spending.Housing starts are now projected to total just one million units in 2008, down from the 1.2 million units forecast in November and the 1.5 million units forecast as recently as last May. The OFHEO index of housing prices is expected to drop 4% in 2008, the first drop in its history, before edging up a scant 0.1% in 2009.
• The NABE economists look for the trade deficit to decline further in 2008, as import growth remains much slower than export growth. The panel also looks for the dollar to recover some of its losses versus the euro over the next two years, with the euro seen to be worth $1.44 in December 2008 and $1.39 in December 2009, down from $1.46 in December 2007.
• Consistent with its lower forecast for 2008 growth, the panel has pushed up its estimate for unemployment and the federal budget deficit. The panel now looks for the unemployment rate to average 5.2% in 2008 and 2009, up from the 4.9% forecast in the November survey. The deficit, boosted by both slower growth and the cost of the fiscal stimulus package, is expected to rise from $162 billion in fiscal 2007 to $375 billion in fiscal 2008. In the November 2007 survey, panelists expected only a $215 billion deficit in fiscal 2008. In 2009, the deficit falls to $321 billion—still twice the fiscal 2007 figure.
• Despite the trimmed projections of output growth, the panel raised its forecast for both headline inflation and “core” inflation in 2008. It now expects the Consumer Price Index to rise 2.5% (on a fourth-quarter-to-fourth-quarter basis) compared with the 2.3% projected in November. On an annual average basis, the revision was more significant, from 2.5% in the November survey to 3.0% in the February survey. Forecasters now expect “core” inflation (as measured by the fourth-quarter-to-fourth-quarter rise in the personal consumption expenditures price index excluding food and energy) to come in at 2.0% in 2008. This compares with the 1.9% projection made in November and would put core PCE inflation at the very top of the Federal Reserve’s perceived comfort zone of 1.0% to 2.0%. Core PCE growth is expected to be 1.9% during 2009.
• The biggest change in this month’s survey was a dramatic reduction in the outlook for interest rates. In November, the panel expected the Fed to keep the funds rate at 4.5% through 2008. With the weakening growth outlook and the funds rate now down to 3.0%, the group now expects the Federal Reserve to cut its target federal funds rate to 2.5% by the end of 2008, and gradually bring it back to 3.5% by the end of 2009. The panelists expect the yield on 10-year Treasury notes to end 2008 at 4.10%, little changed from year-end 2007. In November, they expected the yield to rise to 4.75%. Like the funds rate, the long Treasury rate is expected to rise in 2009, ending the year at 4.5%. The panel does expect that the stock market will recover the ground recently lost, with the S&P index rising to 1500 by the end of 2008 and to 1600 in 2009.
