Recession Unlikely, Housing Sector Correction Nearly Over

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“While the correction in the financial sector is just beginning, the correction in the housing sector is nearly over,” says Gail D. Fosler, president and chief economist of The Conference Board. Her analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board’s global business network.

While the U.S. economy has weakened, business activity and corporate profits continue to rise. Consumer spending is continuing at a rate of 2% to 2.5% a year, and with the exception of the auto industry, the economy is showing gains virtually across the board.

“Exports are booming and imports and import penetration are down,” says Fosler. “While there is continuing uncertainty about the economic outlook, economic shocks from the contracting financial sector are not enough to tip the U.S. economy into recession.”

U.S. Economy is Still Resilient

It has been a long time since the U.S. economy has experienced the kind of sustained downturn reflected in recent stock market declines. The 2001 recession was short-lived, and despite huge losses in the technology and manufacturing sectors, there was almost an undetectable decline in GDP. The last deep recession in the U.S. economy began in 1990. The economy weathered the 1987 stock market crash and the 1988 savings and loan crisis before being plunged into a recession by the Gulf War.

“Similarities between the current situation and the period leading up to the 1990 recession are striking, but there are also many differences,” says Fosler. “The business sector today is fundamentally stronger than at any time since the 1960s, and booming exports are helping support solid and continued structural productivity gains. Also, the policy sector is moving to establish a solid floor of tax and interest rate cuts to support the economy.”

Housing Market Correction About Over

The housing market correction is about over, says Fosler. Given the lags in the impact of the housing sector on the economy, even at current activity levels, housing will likely subtract about 0.4 percentage points from 2008 growth. Housing affordability is beginning to improve, and with the recent interest rate cuts and home price declines, it should improve further and limit the downside risk. January and February are not big months for housing, but rising affordability bodes well for the spring selling season.

Demographic trends also favor housing. The rise in households is increasingly outpacing the rise in permits, so the ratio is rising over time and is reaching a point normally associated with recovery in housing activity. The long housing boom of the past 15 years has taken the home ownership rate up from 64% to a peak of 69% in 2004, reflecting an intrinsic demand for housing. All of this adds up to good structural demand for housing if the credit markets and lending institutions can ease the credit flow.