October 2007 Quarterly Forecast
> The Nation
THE NATION
By David Shulman
Despite the stronger than expected growth in the second quarter of 4%, the re-pricing of hitherto very easy credit will cause the U.S. economy to have a “near recession experience.” Specifically, we forecast real GDP growth to be just above 1% for the fourth quarter of 2007 and the first quarter of 2008. Thereafter, we forecast growth to remain tepid for the balance of 2008 and return to trend 3% growth in 2009. Nevertheless, by mid-2008 the unemployment rate is forecast to reach 5.2%, up from the current 4.6%. Of course, when the economy slows to a 1% pace, it runs the risk of falling into an actual recession, just as when an airplane’s velocity gets too close to its “stall speed” and it falls out of the sky.
As in prior quarters, the source of our pessimism remains the on-going deterioration of the housing market. We have once again lowered our forecast for housing activity as the weight of ever-tightening credit standards and an ebbing of the builders' practice of building houses to get out of the underlying land exact their tolls. Where we previously predicted that housing starts would bottom in the 1.2-1.3 million unit annual rate range, we have now marked down that forecast to 1.0-1.1 million units. Perhaps more importantly, we now believe that the recovery will be far more tepid with starts barely recovering to a 1.4 million unit annual rate by the end of 2009.
Although it has taken longer than what we had previously forecast, the effect of housing weakness has finally spilled over into consumer spending on durable goods. Automobile sales have been soft, especially in the housing bubble states of California and Florida. As a result we are now forecasting that automobile sales in 2008 will be 15.7 million units, the lowest since 1998. Furthermore other consumer durables will suffer especially the housing related furniture and appliance categories and that will lead to an absolute decline in consumer durable spending in 2008.
Nevertheless, we are still sticking to our story that we will not have a classic recession. Why? The trade sector is rapidly improving as a strong global economy increases exports and a sluggish domestic economy reduces imports. Net exports will account for about 1/3 of the 1.8% growth we envisage for next year and corporate investment in equipment and software will be moderately strong. Forecast of US Real GDP Growth (line) and Contributions to Real GDP Growth (bars) from Durable Goods Consumption, Residential Investment, and Net Exports
Source: BEA, UCLA Anderson Forecast
Forecast of U.S. Housing Starts (millions, SAAR)
Source: Census Dept., UCLA Anderson Forecast
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