ECONOMICS: Economic forecasters usually have three choices: Up, Down, or Sideways. In forecasting the outlook for real GDP growth over the rest of the year and in 2009, there seems to be only two camps: Those who expect the economy to continue to muddle along at a slow pace somewhere between zero and 2% and those who expect negative growth. In other words, the consensus outlook is for either a growth recession or an outright downturn in economic activity. Debbie and I are in the middle. We concluded on March 3 that the economy was probably falling into a short and shallow recession. In fact, so far, it has been a blend of a severe recession in the housing and auto industries, a mild recession in the labor markets, a growth recession in consumer spending, and a boom in both exports and nonresidential construction.
The Downers predict that the export boom could soon turn to bust, particularly because Europe is heading into a recession. They believe that consumers have only started to deleverage. They predict that American households will be forced to cut their spending now that the stimulative impact of the economic stimulus payments is over. They don’t see a bottom in housing any time soon. Nonresidential construction is bound to peak soon given tightening credit conditions in the commercial mortgage market. It’s a credible scenario. It is the risk to our relatively happier outlook.
What are the Downers missing? They never talk about productivity, which is booming and boosting real pay per worker. Europe does matter a great deal, but it is a big world out there, and our exporters should continue to find plenty of business in Asia, the Middle East, and Latin America. Our agriculture, energy, and health care industries should continue to boom. The tax rebates were mostly saved during Q2 and should be mostly spent over the rest of the year. Oil prices are falling, which is likely to boost consumer spending. Headline inflation has peaked and could fall below core inflation for a while over the next six months. Central bankers are unlikely to tighten credit conditions. Some might actually have to lower their official interest rates.
What about the credit crunch? That is probably the biggest risk to the Sideways forecast. But the economy has been weathering a credit crunch in the mortgage market and a deepening housing recession for over a year, without sinking into an economy-wide downturn, so far. Another risk is that oil prices spike to $200 or higher if push comes to shove in the Strait of Hormuz. Surely, the US government will immediately release oil from the SPR. Surely, the US Navy will keep the tankers cruising through the Strait. Iran could put up the white flag quickly if its gasoline imports are shut off.
