U.S. Will Escape Recession, Economists Say in Survey (Update1)
By Shobhana Chandra and Alex Tanzi
Jan. 9 (Bloomberg) -- The U.S. will skirt recession as consumer spending slows without collapsing, a survey of economists showed.
Economic growth will average 1.5 percent in the first six months of 2008, matching the fourth quarter's pace, according to the median estimate of 62 economists surveyed by Bloomberg News from Jan. 3 to Jan. 8. The rate of expansion would be the weakest since the last nine months of 2001.
``It's soft economic activity that feels like a recession, but we probably won't have one,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``The state of the consumer is clearly softening, but spending is not declining. That's very important.''
The Federal Reserve will cut interest rates more than previously anticipated, economists said, triggering a reacceleration in growth by the third quarter that will keep the economy from stalling.
Economists put the odds of a recession developing within the next year at 40 percent, according to the median estimate. Nine of the 47 economists responding to the question put the odds at about even and five said the economy would contract.
Goldman Sachs Group Inc. economists now predict a recession, joining their counterparts at Merrill Lynch & Co. and Morgan Stanley.
Bonds, Stocks
Treasury yields have fallen and stocks in the U.S. have dropped as the economic outlook deteriorated. Yields on benchmark 10-year notes yesterday reached 3.77 percent, the lowest since March 2004. They were at 3.81 percent at 7:56 a.m. in New York today. The Standard & Poor's 500 stock index yesterday fell to the lowest closing level since March.
Growth forecasts were lowered for every quarter of the year, even as the estimate for the last three months of 2007 was boosted. The world's largest economy will expand 2.1 percent in 2008, down from 2.3 percent forecast last month and the weakest since 2002.
``We're skating on the thin edge of a recession, but we'll narrowly miss one,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``At the end of the day, it boils down to the consumer, who has remained relatively resilient.''
Gains in income will help ``prop up'' spending, which accounts for more than two-thirds of the economy, even after the job market softened in December, said Bryson.
Spending Growth
Spending grew at a 2.6 percent annual pace during the holidays last quarter, little changed from the previous three months and about a percentage point faster than predicted in December, according to the survey median. Economists pared estimates for the first six months of this year and boosted the forecast for the third quarter.
The Fed will reduce borrowing costs in both the first and second quarters, bringing the benchmark interest rate down to 3.5 percent by mid-year. Last month, economists forecast the Fed would reduce the rate just once more and hold it at 4 percent through 2008.
Interest-rate reductions will ``eventually stimulate demand,'' said Bank of America's Levy. Growth in the second half of the year will pick up to an average 2.5 percent pace, according to the latest estimates.
Rising exports and business investment will also help keep the economy's head above water. Still, growth concerns will trump some policy makers' unease about inflation as food and fuel prices climb, economists said.
Impact From Housing
The housing slump, now in its third year, will lead to more foreclosures that will further depress property values, making Americans feel less wealthy.
Employment, once a bright spot, may now become another headwind for consumers. The economy created just 18,000 jobs in December, capping the worst year for hiring since 2003, government data showed last week. The jobless rate jumped to a two-year high of 5 percent as builders, mortgage companies and manufacturers reduced payrolls.
The increase in unemployment convinced Harvard University economist Martin Feldstein, head of the National Bureau of Economic Research and member of the committee that determines when recessions begin and end, that a downturn was on the way.
``We are now talking about more likely than not,'' Feldstein said in a Jan. 5 interview. ``I have been saying about 50 percent. This now pushes it up a bit above that.''
`By Their Fingernails'
``Consumers are holding on by their fingernails,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ``We still have spending on absolute necessities while they're cutting back on discretionary purchases.''
December retail sales figures won't be available until the Commerce Department's Jan. 15 report, making forecasting even more difficult, economists said. Combined November-December purchases probably amounted to the weakest holiday season in five years, according to forecasts from industry groups including the International Council of Shopping Centers.
``The debate here is whether the economy is quite weak or whether it is falling into a recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``So far, I'm in the quite-weak camp.''
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