Recession Unlikely, Housing Sector Correction Nearly Over, Reports New Analysis from...

Recession Unlikely, Housing Sector Correction Nearly Over, Reports New
Analysis from The Conference Board

NEW YORK, Feb. 20 /PRNewswire/ -- Despite continuing turmoil in the
housing and financial markets, a U.S. recession is not imminent, The
Conference Board reports today.
"While the correction in the financial sector is just beginning, the
correction in the housing sector is nearly over," declares Gail D. Fosler,
President and Chief Economist of The Conference Board. Her analysis appears in
StraightTalk, a newsletter designed exclusively for members of The Conference
Board's global business network.
While the U.S. economy has weakened, business activity and corporate
profits continue to rise. Consumer spending is continuing at a rate of 2 to
2.5 percent a year, and with the exception of the auto industry, the economy
is showing gains virtually across the board.
"Exports are booming and imports and import penetration are down," says
Fosler. "While there is continuing uncertainty about the economic outlook,
economic shocks from the contracting financial sector are not enough to tip
the U.S. economy into recession."
U.S. Economy is Still Resilient
It has been a long time since the U.S. economy has experienced the kind of
sustained downturn reflected in recent stock market declines. The 2001
recession was short-lived, and despite huge losses in the technology and
manufacturing sectors, there was almost an undetectable decline in GDP. The
last deep recession in the U.S. economy began in 1990. The economy weathered
the 1987 stock market crash and the 1988 savings and loan crisis before being
plunged into a recession by the Gulf War.
"Similarities between the current situation and the period leading up to
the 1990 recession are striking, but there are also many differences," says
Fosler. "The business sector today is fundamentally stronger than at any time
since the 1960s, and booming exports are helping support solid and continued
structural productivity gains. Also, the policy sector is moving to establish
a solid floor of tax and interest rate cuts to support the economy."
Housing Market Correction About Over
The housing market correction is about over, says Fosler. Given the lags
in the impact of the housing sector on the economy, even at current activity
levels, housing will likely subtract about 0.4 percentage points from 2008
growth. Housing affordability is beginning to improve, and with the recent
interest rate cuts and home price declines, it should improve further and
limit the downside risk. January and February are not big months for housing,
but rising affordability bodes well for the spring selling season.
Demographic trends also favor housing. The rise in households is
increasingly outpacing the rise in permits, so the ratio is rising over time
and is reaching a point normally associated with recovery in housing activity.
The long housing boom of the past 15 years has taken the home ownership rate
up from 64 percent to a peak of 69 percent in 2004, reflecting an intrinsic
demand for housing. All of this adds up to good structural demand for housing
if the credit markets and lending institutions can ease the credit flow.
Financial Sector Still Struggling
The business sector, outside of the financial sector, remains strong. U.S.
business has engaged in almost constant restructuring, and these ongoing
adjustments to changing business conditions have left the nonfinancial
business sector generally lean and focused.
The business sector is also benefiting from the export boom and strength
in corporate activities outside the U.S. Exports are rising at about a 13
percent annual rate, and the slowdown in imports means that U.S. companies are
taking a larger share of U.S. demand. The improvement in the trade sector
alone is likely to add about a half percentage point to growth this year -
more than offsetting the decline in housing.
The bad news is concentrated in the financial sector. Recent data indicate
that financial sector profits decreased dramatically over the second half of
2007. Basic earnings data show that financial services profits collapsed from
about $10 per share in the second quarter of 2007 to a loss of almost $2 in
the fourth quarter. Not only have these losses been substantial, but they have
been concentrated in some of the largest financial institutions, both in terms
of assets and market capitalization. Top global financial institutions have
disclosed roughly $125 to $150 billion in asset writedowns associated with the
recent financial turmoil. But when all the dust settles, even if their
profitability is damaged, their balance sheets are likely to be little
affected. Because of the mark-to-market rules, the writeoffs associated with
structured products, including subprime mortgages, are likely to be revalued
over the course of the year as the markets begin to trade those securities.
Soft and Sluggish Consumer Sector
The consumer sector has weakened gradually over the past two and a half
years. Although real consumer spending grew at above 4 percent in mid-2005, it
has since slowed to the 2-2.5 percent range. On one level, this slowdown in
consumer spending is a response to higher gas prices and low demand for
automobiles. But there is very little impact evident from the effects of
almost two years of housing declines. Income gains continue to be reasonably
strong. Total wage and salary growth is running at about a 5 percent annual
rate.
"On a broader level, it is important to recognize that the slowdown in
consumer spending is part of the rebalancing of the U.S. economy," concludes
Fosler. "Americans have enjoyed over two decades of continuous consumer
spending growth, which is one of the causes for the large trade deficits over
the past decade. These gains go well beyond the normal term of an economic
cycle and diminish as consumer needs are met or even overmet."
Source: StraightTalk Vol. 19 No. 1
The Conference Board

About The Conference Board
Non-partisan and not-for-profit, The Conference Board is one of the
world's leading business membership and research organizations. The Conference
Board produces The Consumer Confidence Index and the Leading Economic
Indicators for the U.S. and other major nations. These barometers can have a
major impact on the financial markets. The Conference Board also produces a
wide range of authoritative reports on corporate governance and ethics, human
resources and diversity, executive compensation and corporate citizenship. Our
conference and council programs bring together more than 10,000 senior
executives each year to share insights and learn from each other. Visit The
Conference Board website at www.conference-board.org.
SOURCE The Conference Board

Ken Goldstein of The Conference Board, +1-212-339-0331,
Goldstein@conference-board.org