Friday, April 11, 2008

Choosy economists choose recession 

The latest WSJ survey of economic forecasters is out today and finds three of four economists are saying the U.S. economy is in recession, and almost as many say the bottom is yet to come.
When asked what the biggest downside risk to their forecast was, 35% said further deterioration in the credit markets, while 25% said it was a sharp drop in consumer spending and 13% said continued housing weakness.

...After three consecutive drops in nonfarm payrolls, the economists said they now expect the economy to shed an average 1,625 jobs a month over the next year. They expect the unemployment rate, now 5.1%, to rise to 5.6% by December. Meanwhile, just 21% of the economists expect home prices to hit bottom this year, while 67% see the bottom next year and 12% say it won't be until 2010.

The respondents on average expect U.S. gross domestic product, which grew at a slim 0.6% annual rate in the fourth quarter, to expand by an anemic 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter. Most of the economists said they expect a contraction in the first half, but those expecting growth pushed the average into positive territory.

Consistent with their view that the economy will hit bottom soon, the economists said they expect the Fed to trim its benchmark federal-funds rate by another half percentage point from the current 2.25% by June -- and then to keep rates unchanged for the rest of the year.

I cannot figure from the graphs a median on the quarterly GDP forecasts, but the report indicates they are negative. Dan Laufenberg of Ameriprise has a forecast of 3.6% growth in Q2, a full percent higher than any other forecaster. (Dan is a frequent panelist at the St. Cloud Area Economic Outlook each February, but missed us this year due to a pressing engagement elsewhere.)

If someone asks me if the national economy is in recession, my answer is "I think so." There are some looks at me that suggest they think I'm hedging -- surely you've heard the news today oh boy, the story of an economy that's tanking. And the Fed! Oy vey! But the truth is we don't really know and don't have a negative GDP quarter yet, and we might not. I'm persuaded by the monthly data, but until we see the Q1 figure at the end of the month a small amount of doubt must remain.

That the survey showed little concern over inflation gives some reason to think that, if the economy looks a little worse than we currently think, there's at least a couple bullets left in the Fed's holster. I'll use a separate post to discuss the criticism the Fed's getting right now.