Recession Unlikely, Housing Sector Correction Nearly Over
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Financial Sector Still Struggling
The business sector, outside of the financial sector, remains strong. U.S. business has engaged in almost constant restructuring, and these ongoing adjustments to changing business conditions have left the non-financial business sector generally lean and focused.
The business sector is also benefiting from the export boom and strength in corporate activities outside the U.S. Exports are rising at about a 13% annual rate, and the slowdown in imports means that U.S. companies are taking a larger share of U.S. demand. The improvement in the trade sector alone is likely to add about a half percentage point to growth this year—more than offsetting the decline in housing.
The bad news is concentrated in the financial sector.
Recent data indicate that financial sector profits decreased dramatically over the second half of 2007. Basic earnings data show that financial services profits collapsed from about $10 per share in the second quarter of 2007 to a loss of almost $2 in the fourth quarter. Not only have these losses been substantial, but they have been concentrated in some of the largest financial institutions, both in terms of assets and market capitalization.
Top global financial institutions have disclosed roughly $125 to $150 billion in asset write-downs associated with the recent financial turmoil. But when all the dust settles, even if their profitability is damaged, their balance sheets are likely to be little affected. Because of the mark-to-market rules, the write-offs associated with structured products, including sub-prime mortgages, are likely to be revalued over the course of the year as the markets begin to trade those securities.
Soft and Sluggish Consumer Sector
The consumer sector has weakened gradually over the past two and a half years. Although real consumer spending grew at above 4% in mid-2005, it has since slowed to the 2% to 2.5% range. On one level, this slowdown in consumer spending is a response to higher gas prices and low demand for automobiles. But there is very little impact evident from the effects of almost two years of housing declines. Income gains continue to be reasonably strong. Total wage and salary growth is running at about a 5% annual rate.
“On a broader level, it is important to recognize that the slowdown in consumer spending is part of the rebalancing of the U.S. economy,” says Fosler. “Americans have enjoyed over two decades of continuous consumer spending growth, which is one of the causes for the large trade deficits over the past decade. These gains go well beyond the normal term of an economic cycle and diminish as consumer needs are met or even overmet.”
