Economic outlook dims sharply

[Lt_Ripley]

Economic outlook dims sharply

A slump seems inevitable, many experts now say. But they differ on its duration.

By Ron Scherer | Staff writer of The Christian Science Monitor

New York

The US economic outlook is turning bleaker. Instead of asking whether there will be a slump, economists are now wondering how long and how deep the downturn will last.

According to some models, the economy has a rough first six months, probably contracting or showing almost no growth, then it recovers. More pessimistic economists see the downturn lasting longer, with the unemployment rate moving closer to 7 percent and growth constrained through 2009.

"Why is there so much uncertainty and angst?" asks Mark Zandi, chief economist at Moody's Economy.com. "It's because [the duration of the slump] depends on how deep and broad the problems in the credit market are. And right now, it's impossible to gauge because there is no good information."

Only a few months ago, Mr. Zandi thought there was at least a 50 percent chance the US economy would squeak through this year without a recession. Then the job market collapsed in December, holiday sales were disappointing, and the turmoil in the financial markets grew worse. Now, with economic conditions overseas weakening, he's more gloomy: "Economists all over are downgrading their forecasts and an increasing number have an outright recession forecast."

Those downgrades and forecasts are behind the rush by Congress to pass an economic stimulus package. They are one of the main reasons why the Federal Reserve decided on Tuesday to drop interest rates by three-quarters of a percentage point. And they are one of the reasons why the financial markets on Wednesday remained turbulent.

Even government economists admit the economic sands are shifting quickly. On Wednesday, the Congressional Budget Office projected the economy would grow by 1.7 percent in 2008. But CBO Director Peter Orszag also testified before Congress that "the state of the economy is particularly uncertain at the moment."

The optimists see the economy as rebounding somewhat in the second half. One of those is Bernard Baumohl, managing director of the Economic Outlook Group in Princeton, N.J., who says, "I believe we are in the initial phase of a recession."

But Mr. Baumohl believes the combination of interest-rate cuts and fiscal stimulus will set the groundwork for the economy to begin to come back in the second half. "I think we will see the beginning of a recovery, although it will be a soft one," he says.

As happens with all downturns, economists anticipate the unemployment rate will rise, probably throughout the year since business is often late in responding to changes in the economy. On Wednesday, Citigroup economist Steven Wieting cut his estimate for economic growth from 2.4 percent to 1.2 percent and projected unemployment would rise from its current level of 5 percent to 6 percent. This would imply a loss of about 2.5 million jobs.

Mr. Wieting currently expects the slump to be "mild but prolonged," not "quick and deep."

One of the reasons for a longer growth hiatus is that consumers will not be able to use their homes to get access to debt, says Michael Barron, CEO of Knott Capital, an investment advisory firm in Exton, Pa. "Consumers have been able to inflate their balance sheets with rising home prices."

On Tuesday, economist David Rosenberg of Merrill Lynch projected housing prices would fall 15 percent in 2008 and another 10 percent in 2009. In a draconian forecast, he sees housing starts falling another 30 percent to a low not seen since 1982. He says the decline will be necessary to clear record inventories.

With home prices flat or falling, it will be harder for consumers to buy boats, cars, and appliances, he argues. "There will be no pent-up demand, which normally helps lift us out of economic weakness," says Mr. Barron.

Barron also says the economy has changed because the banking system has tightened its lending standards. "Money is available, but the banks don't have to lend it," he says. "It is not that the demand is not there, but there is a higher scrutiny."

Baumohl says the key to recovery will be how fast the financial sector can strengthen its balance sheet. In recent weeks, financial institutions from Bank of America to Citigroup to Merrill Lynch have written off billions of dollars in loans.

"We have rarely had a recession where the financial sector is in such trouble," he says.

The problems in the financial sector are the main reason that economist Gregory Miller of SunTrust Banks in Atlanta says the economy won't recover until the first half of 2009. "We are in a situation where the interest rates are falling but they don't generate much activity," he says. "Banks are very reluctant to add new assets to their balance sheets when they are still uncertain about the value of the loans they have on their books already."

http://www.csmonitor.com/2008/0124/p01s02-usec.html

[AROCES]

I would go against the so called experts. Interest rates are being lowered now by the Feds, and I can see the price of oil will start going down because of the current situation. OPEC itself and future Oil buyers won't pay that much for Oil if the economic outlook does not look good.

I say it won't be as bad as advertised, whoever the next President is will get the credit when the market fix itself.

[questionmark]

I would go against the so called experts. Interest rates are being lowered now by the Feds, and I can see the price of oil will start going down because of the current situation. OPEC itself and future Oil buyers won't pay that much for Oil if the economic outlook does not look good.

I say it won't be as bad as advertised, whoever the next President is will get the credit when the market fix itself.

The point is that growth on credit is not growth, it is tomorrow's recession. Don't you get that?

[AROCES]

The point is that growth on credit is not growth, it is tomorrow's recession. Don't you get that?

How long has credit been around?

[Guardsman Bass]

I would go against the so called experts. Interest rates are being lowered now by the Feds, and I can see the price of oil will start going down because of the current situation. OPEC itself and future Oil buyers won't pay that much for Oil if the economic outlook does not look good.

I say it won't be as bad as advertised, whoever the next President is will get the credit when the market fix itself.

The interest rate lowering helps, particularly in terms of giving confidence back to Wall Street. However, it remains a double-edged sword; inflation is at a 15-year high, and what this amounts to is that the Fed is going to pump a greater amount of money into the economy (on top of the Stimulus package), which makes inflation worse. That's why the European Central Bank didn't lower interest rates in unison with the Federal Reserve; like most such central banks, their primary concern remains inflation, not economic stimulus. It would be a sad thing if we ended up with stagflation (heavy inflation with stagnant economic growth) simply because the Fed was afraid that Wall Street was going to have a Black Tuesday last week.

The Oil issue depends on how much of the new price is simply reflected in the good economic conditions, and how much of it is being taken up by permanent increases in demand (read: China and India and the increasing demands for cars). I'll be more relieved when (or if) it gets back down below $80/barrel.

[questionmark]

How long has credit been around?

This is not about how long credit has been around, it is about : The GDP grew by 3% while the public and private debts grew by 20% of GDP. That is in plain English a recession of 17%, not a growth because paying back those credits will take away from the money needed in future growth. And in this I have not even included the apparent growth that is not due to inflation.

ED: clarification

Edited January 26, 2008 by questionmark

[AROCES]

The interest rate lowering helps, particularly in terms of giving confidence back to Wall Street. However, it remains a double-edged sword; inflation is at a 15-year high, and what this amounts to is that the Fed is going to pump a greater amount of money into the economy (on top of the Stimulus package), which makes inflation worse. That's why the European Central Bank didn't lower interest rates in unison with the Federal Reserve; like most such central banks, their primary concern remains inflation, not economic stimulus. It would be a sad thing if we ended up with stagflation (heavy inflation with stagnant economic growth) simply because the Fed was afraid that Wall Street was going to have a Black Tuesday last week.

New home buyers are starting to position themself to get in, interest rates are becoming hard to not take advantage of and house price won't go much lower for buyers will start coming in.

A house that sells for 500K 2 years ago is now worth 400K, at 350-370K I would bet buyers will come in and not wait any longer.

The Oil issue depends on how much of the new price is simply reflected in the good economic conditions, and how much of it is being taken up by permanent increases in demand (read: China and India and the increasing demands for cars). I'll be more relieved when (or if) it gets back down below $80/barrel.

So you agree, by saying depends on how much. Of course the price will go as low as needed but not too low.

[Stardrive]

I have to agree Q, It's not about how long credit has been around, but how long the abuse of credit has been going on. Because of the abuse of credit, the Feds have borrowed from the future to make the "here and now" look prosperous. The "here and now" is gone and the future is upon us.

I do however know why the automobile industry is in a slump. Word on the street is, no one buys a new car (only used) until they give us better mpg (50+mpg minimum) and/or better hybrid/electric alternatives.

Until then we say "choke on it".

[Dowdy]

Lowering the interest rates in the US may help them for awhile but will just make it worst for them in the long run. Its the lowering of interest rates that got them in this mess in the first place

[Lt_Ripley]

ah I can only shake my head. I find out my brother and his wife are about to loose their home of 14 years. remortgages because of higher bills and anxious lenders to do so ... then my brother out of work for health reasons , unemployment runs dry , no medical from his old job , his wife working a crap paying job ( few jobs around here) but great medical which is now covering him .................

hopefully they , who are not the sharpest knives in the drawer, can find fraud with their lenders. Or find a way to keep their home.

this economy sucks. thanks bush.

don't forget those creeping higher property taxes !!!

Edited January 26, 2008 by Lt_Ripley

[Lt_Ripley]

Lowering the interest rates in the US may help them for awhile but will just make it worst for them in the long run. Its the lowering of interest rates that got them in this mess in the first place

exactly. time to cut the corporate welfare , tighten belts , pay taxes , bring home the troops , quit funding the mid east and isreal.

time to start remembering how to save a buck. cons say that but never do.

[Caesar]

The Christian Science Monitor is a liberal group. I think the problem now is that the fed is (and has been) trying to fine tune everything, fixing one buble by starting another, like the housing buble, for keeping rates low. I think the economy would be ok if we stayed on this track, the thing that scares me is the elections. I don't think theres a good canidate from either group or this "stimulus package" that is being processed. I think this package won't do much of anything but rather more about politics then anything else.

[questionmark]

The Christian Science Monitor is a liberal group. I think the problem now is that the fed is (and has been) trying to fine tune everything, fixing one buble by starting another, like the housing buble, for keeping rates low. I think the economy would be ok if we stayed on this track, the thing that scares me is the elections. I don't think theres a good canidate from either group or this "stimulus package" that is being processed. I think this package won't do much of anything but rather more about politics then anything else.

There is only one way to fix it: Produce at least as much as you are consuming while at the same time not spending more than you are earning minus what you have to repay on debts.

And that also goes for the government.

[keithisco]

Rumours tonight have it that the Fed will cut another 0,5% off the base rate next week. That will definitely cause some people to think that panic measures are being used. Wont do much for confidence I think, and it will release even more money into the economy. I see it as a possible inflationary strategy that will help no-one in the long run. A short-term solution to a systemic problem.

[questionmark]

Rumours tonight have it that the Fed will cut another 0,5% off the base rate next week. That will definitely cause some people to think that panic measures are being used. Wont do much for confidence I think, and it will release even more money into the economy. I see it as a possible inflationary strategy that will help no-one in the long run. A short-term solution to a systemic problem.

My bet is .25, mostly because part of the crash was caused by the French bank trying to recoup some of the contracts from a rough trader (who had already gambled more than the bank was worth).

The problem is that any hiccup, even if totally out of control of the Fed or the US government can blow the whole thing sky high because everybody is realizing that they are sitting on a whole bunch of papers without backing. They just don't want to rock the boat, because if nothing happens they could recoup part of it, if something happens...nothing.

[Caesar]

My bet is 50 basis points, and another .25 a few weeks later. I think the fed will over react.

[questionmark]

My bet is 50 basis points, and another .25 a few weeks later. I think the fed will over react.

Congrats, you judged Bernanke right... no guts the guy.

*Sends Whiskey*

[AROCES]

This is not about how long credit has been around, it is about : The GDP grew by 3% while the public and private debts grew by 20% of GDP. That is in plain English a recession of 17%, not a growth because paying back those credits will take away from the money needed in future growth. And in this I have not even included the apparent growth that is not due to inflation.

ED: clarification

Who uses that formula of yours as a recession indicator? Private debt grew by 20%? on what interest and at what kind of loan terms, it varies right?

[Caesar]

Congrats, you judged Bernanke right... no guts the guy.

*Sends Whiskey*

Questionmark, I'm right about EVERYTHING!!! the reason why it was 50 because I think the fed wanted the funds rate to match the 10 year note. this economy isn't great, but in no way are we in a recession. we get the jobs report in on Friday, I don't think that will show any gains but invintories are getting low, that along with yeild curves are show we will be in an up trend. I also think the sectors that are showing big gains is another great sign, and its not oil/energy leading the way.

[Caesar]

But what makes you say its all Bernankes fault. I think Greenspan created most of the bubles we have had. keep rates to low for to long, then rasing them and keeping them high for to long.

Heres a chart, notice how leval it was till 2001 then this drop, then a sharp rise

[Dowdy]

New home buyers are starting to position themself to get in, interest rates are becoming hard to not take advantage of and house price won't go much lower for buyers will start coming in.

A house that sells for 500K 2 years ago is now worth 400K, at 350-370K I would bet buyers will come in and not wait any longer.

I'm glad your not a finacial adviser. It attitudes like yours that created this housing crisis. That and shady lenders.

When the interest rate was at 1% you heard pretty much the same thing - now is a good time to buy. That may be true but you only buy what you can afford - shady lender or not.

Also, are you suggesting that first home buyers, buy a house worth 350-370k! Its not just in america but everywhere. First home buyers want a huge double story as their first home - no wonders they can't afford it! Start off small and work you way up.

[Syd Boggle]

The point is that growth on credit is not growth, it is tomorrow's recession. Don't you get that?

Brilliant point Questionmark.....couldn't have put it better myself...

If we look at the housing market as an example, real estate trends don't fluctuate like shares on a day by day basis, a housing boom builds up over years.

Real estate movement are like a massive juggernaut, Once it starts heading in one direction it continues for a long time (years) before it slows down...(and know one really knows if the Juggernaut is rolling down a small hill, or Mount everest!)

so of course, the Real estate trend is turning downwards, and will continue for a good while yet...and will drag the economy with it....

Edited January 31, 2008 by Syd Boggle

[Aztec Warrior]

This is not about how long credit has been around, it is about : The GDP grew by 3% while the public and private debts grew by 20% of GDP. That is in plain English a recession of 17%, not a growth because paying back those credits will take away from the money needed in future growth. And in this I have not even included the apparent growth that is not due to inflation.

ED: clarification

A recession of 17%.....what are you talking about?

I have to agree Q, It's not about how long credit has been around, but how long the abuse of credit has been going on. Because of the abuse of credit, the Feds have borrowed from the future to make the "here and now" look prosperous. The "here and now" is gone and the future is upon us.

I do however know why the automobile industry is in a slump. Word on the street is, no one buys a new car (only used) until they give us better mpg (50+mpg minimum) and/or better hybrid/electric alternatives.

Until then we say "choke on it".

Approximately 14 different lenders are being investigated for fraudulent accounting in connection with subprime loans. That has NOTHING to do with the Federal interest rate.

Both my cars are over ten years old...and paid for.

I'm glad your not a finacial adviser. It attitudes like yours that created this housing crisis. That and shady lenders.

When the interest rate was at 1% you heard pretty much the same thing - now is a good time to buy. That may be true but you only buy what you can afford - shady lender or not.

Also, are you suggesting that first home buyers, buy a house worth 350-370k! Its not just in america but everywhere. First home buyers want a huge double story as their first home - no wonders they can't afford it! Start off small and work you way up.

Interest rates were never 1%.

[questionmark]

A recession of 17%.....what are you talking about?

I am talking about that not everything that is called growth really IS growth.

Our governments have funny ways to calculate it, if some government were to hire 1000 guys to do nothing but chair farting and pencil sharpening for some reason they would classify that as growth.

If items are purchased on credit it is also classified as "growth" even though credit takes away from future growth. If 20% of GDP is bought on credit they still call it growth... which it is not. That is what I am talking about.

[Syd Boggle]

I am talking about that not everything that is called growth really IS growth.

Our governments have funny ways to calculate it, if some government were to hire 1000 guys to do nothing but chair farting and pencil sharpening for some reason they would classify that as growth.

If items are purchased on credit it is also classified as "growth" even though credit takes away from future growth. If 20% of GDP is bought on credit they still call it growth... which it is not. That is what I am talking about.

Spot on....