DC Velocity on the Economy

newsworthy2008 economic outlook: "a lot of risks out there"

DC VELOCITY readers who responded to a survey asking about their outlook for the next 12 months are of two minds. While one-third are pessimistic and 29 percent are unsure about what the future holds, 38 percent say they're optimistic about the coming year.
By DC Velocity StaffFrom the January 2008 issue

It could be a long year.
Or then again, maybe not. DC VELOCITY readers who responded to a survey asking about their outlook for the next 12 months are of two minds. While one-third are pessimistic and 29 percent are unsure about what the future holds, 38 percent say they're optimistic about the coming year.
When it comes to the U.S. economy's prospects for growth, however, the survey respondents are significantly less optimistic. Only 19 percent expect strong growth, 44 percent expect the economy to be flat, and 37 percent expect growth will be weak.
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As it turns out, economists don't see much cause for optimism either, at least until the second half of the year. That much was clear during Global Insight's World Economic Outlook Conference in Boston in late October, when economists and invited speakers cited several risks to the economy.
In his top 10 economic predictions for 2008, released after the conference, Global Insight Chief Economist Nariman Behravesh essentially sided with the pessimists. "The U.S. economy is now in the danger zone," he wrote.
Behravesh predicted that the pace of economic growth in the United States would be the slowest since 2002, when the nation was recovering from the 9/11 terrorist attacks and the dot-com implosion. He said he expects growth of no more than 1.9 percent and that it could be even lower. Growth in the first half of the year will be particularly sluggish, he predicted, inching upward at an annual rate of 1.3 percent.
Could the nation slide into recession? Though Behravesh stopped short of saying that, he did warn that the risk is there. "The combination of the housing/subprime crisis and higher oil prices could be enough to push growth into negative territory," he wrote in his post-conference predictions. (Global Insight places the probability of a U.S. recession at 40 percent.)
Behravesh believes the housing slump could slow real growth in the U.S. gross domestic product (GDP) by a full percentage point. And he expects the slowdown to have repercussions for economies in other parts of the world.He also said he believes that the housing slump will bottom out at mid-year, when housing starts will be just half of what they were in 2005. Housing prices, though, will continue to fall through 2009, he predicted.
The second major risk to the economy is the price of oil, which stood at more than $91 a barrel in mid-December. Behravesh told conference attendees that he expects oil prices will ease to somewhere around $75 to $80 a barrel, but that he does not foresee prices falling much below $75. He added the proviso that in an era of tight supply, any sort of disruption could send prices soaring again.
Will exports save the day?Exports may be the only saving grace for the U.S. economy. Behravesh predicts exports will contribute 0.9 percent to the U.S. economy's growth—accounting for almost half of the expected total increase. Nigel Gault, managing director of Global Insight's North American Macroeconomics Group, said at the conference that his firm expects exports to grow by 9.5 percent this year,more than double the 3.4 percent rate expected for imports.
The strong export outlook may help explain why respondents to DC VELOCITY's survey are essentially bullish about their own companies' prospects, yet bearish about the U.S. economy as a whole.Nearly half (47 percent) of the respondents say they expect their employers will see strong growth.
Furthermore, half of those surveyed expect to increase their spending on material handling products, freight transportation, information technologies, and other logistics-related products and services this year. In fact, 65 percent anticipate that their spending on those areas will increase by 3 to 9 percent. Not all of that money will be channeled into new equipment and technology, of course: Fully 92 percent say the cost of fuel has been a significant factor in rising freight expenses.
Meanwhile, Behravesh expects that rising exports (a result of the weak dollar) combined with slowing imports (a result of the sluggish economy) will help shrink the nation's current-account deficit. That net flow of capital out of the country—a consequence of the nation's longstanding pattern of importing far more than it exports—has long worried economists. Even with some correction coming, Global Insight expects the deficit will be $659 billion in 2008, compared to $755 billion in 2007.
The current-account deficit for the second quarter of 2007—the latest number available at press time—was $190.8 billion, or about 5.5 percent of GDP. To be considered healthy, Behravesh said, that number should not exceed 3 percent.
The economy's relative weakness is likely to keep inflation in check, Behravesh continued. He anticipates it will fall from 2.0 percent in 2007 to 1.8 percent this year for the "core personal consumption deflator" (a measure of the average increase in prices for all domestic personal consumption), and from 2.3 percent to 2.1 percent for the Consumer Price Index (a measure of prices for a fixed basket of goods). He also believes the Federal Reserve will continue to cut interest rates.
Looking beyond U.S. borders, Behravesh foresees a difficult year for Europe, resulting from the overall global slowdown, a strong euro, the international credit crunch, its own housing crisis, and high oil prices. Meanwhile, China's economy will grow at a 10.8-percent clip, though the Chinese government is expected to tighten credit after next year's Beijing Olympics, which could lead to a "hard landing" there. Still, he noted, when you consider the nation's current rate of growth, a hard landing for China would still mean growth in the range of 5 to 6 percent.
Back in October, Behravesh characterized the risk of a U.S. recession as relatively low. But the odds of a recession have certainly increased since then. As he told the conference audience in what could turn out to be an understatement: "There are a lot of risks out there."