| The fallout from the housing slump and the so-called “credit crunch” will prove less severe than many fear, said Wells Fargo’s senior economists during the company’s annual economic forecast teleconference recently.
“Healthy export growth and continued business spending will help the economy steer clear of an outright recession, but I believe that won’t be significant enough to prevent an economic slowdown,” said Dr. Scott Anderson, senior economist for Wells Fargo & Company. “Rapidly cooling earnings growth and rising economic uncertainty will make U.S. companies reluctant to undertake ambitious expansion plans.”
Dr. Jim Paulsen, chief investment strategist of Wells Capital Management, however, says he remains optimistic about the U.S. economy. “The stock market is within five percent of all-time highs and eight out of the 10 economic sectors in the S & P 500 are up six percent or better which has given a four percent bond yield. More than 95 percent of people in the U.S. who want to have a job have one and they’re still spending. Retail sales for the first two months of the last quarter were better than expected and the global economy has more contributors to growth then ever before.”
“The big story here,” Paulsen added “is that while housing spending has taken a full percentage point off real GDP growth, it’s been totally offset by a percentage point gained in trade. For the first time in about 15 years, export growth is adding to real GDP growth, and it will continue as the dollar continues to weaken.”
Inflation
The economists agree that despite a slower U.S. economy, there is no guarantee it will slow inflation. They predict consumer inflation to remain near four percent, driven by global demand for food, commodities and oil.
Dr. Eugenio Aleman, senior economist for Wells Fargo & Company, said his two biggest concerns are the credit crunch and inflation. “Inflation is the most pressing problem for the Federal Reserve today,” said Aleman. “The rate of inflation has been increasing the past several years — such increases take a long time to build into the system, into expectations, into our daily lives. And once they do, it’s very difficult to get rid of the problem. The longer we take in slowing down inflation, the more difficult and risky it gets for the Federal Reserve and the economy.”
Consumer Spending and Labor Market
The economists agree consumers will feel a little tapped out after the holiday season, and that’ll affect their spending behavior. “The interest rate pain relievers prescribed by the Fed will take at least six months to take effect and may not be strong enough to deaden the financial pain,” said Anderson. He forecasts a 1.8 percent growth rate in consumer spending next year, down from 2.8 percent in 2007. “Tighter credit and lender standards are playing a role, but the primary driver of the weakening consumer is the labor market, with payroll growth down to a paltry 0.8 percent.”
Anderson forecasts a 5.1 percent unemployment rate by the third quarter of 2008 and says a rising unemployment rate could magnify housing and consumer spending problems. “Many Americans appear to be one job loss away from mortgage default and bankruptcy. If unemployment rates rise more than expected, banks would respond by further restricting credit, home prices would fall below current expectations of a 10 percent national decline, and we’d see a downward spiral in the economy.”
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