Forecasters Increase Odds Of
Recession Over Next Year

SUDEEP REDDY / Wall Street Journal 12sep2007

Economic forecasters are boosting the odds that the U.S. will slide into recession in the next 12 months as the housing slump deepens and the credit crisis continues.

The latest WSJ.com survey of economists, conducted in the days following the gloomy Sept. 7 employment report, pegged the recession risk at 36%, up from a 28% probability a month earlier. Three-fourths of the 52 economists responding to the recession question put the odds at or above 30% and 11 put the odds at 50% or better. The range was wide — from 5% to 90%.

"The economy has been juiced by this rapid credit expansion, and I think that's over," said Steve East, chief economist at Friedman, Billings, Ramsey, who put recession odds at 60%. "That's the message of the credit market turmoil: The economy is not going to have as much high-octane fuel to run on."

Only one out of eight economists say the credit crisis, with related market turmoil, has mostly run its course. About 60% say it is about half over, with the rest saying it is in the early stages.

The economists' most likely case is for substantially slower growth. On average, they project fourth-quarter gross domestic product to rise at a 1.9% annual rate, well below the 2.5% they estimated a month earlier. Growth in the first quarter of 2008 is seen at 2.1%, down from an earlier average estimate of 2.6%.

Analysts who remain the most positive about the economy's resilience point to continued expansion in manufacturing and a strong global economy supporting U.S. export growth.

Alliance Bernstein economist Joseph Carson, who puts recession odds at 5%, said the housing sector remains a risk, but consumers have already made spending adjustments as a result of the downturn eating into household wealth, he said. "We think the spending trends are still pointing to modest growth in the U.S., not a recession," Mr. Carson said.

Last week's drop in payrolls — the first in four years — spurred new worries about a recession.

The economists on average expect the nation's unemployment rate to hit 4.8% by this December — up from 4.6% now — and 4.9% by next June. Less than half — 22 out of 55 economists — see unemployment at or above 5% by December 2008.

Nonfarm payrolls are estimated to grow almost 83,000 a month on average over the next year, well below projected growth of more than 108,000 jobs in the August WSJ.com survey. Projections ranged from an average monthly drop of 30,000 jobs to a monthly gain of 173,000 jobs.

About 85% of forecasters said economic conditions warrant a cut in interest rates by the Federal Reserve.

"The drop in trend employment growth is stark and deserves a response from the Fed if only for insurance reasons," Wells Fargo economist Scott Anderson said in the survey.

The forecasters expect a series of rate cuts that would bring the benchmark federal funds rate to about 4.5% by the middle of next year.

Three out of four economists said the Fed helped cause the latest credit market turmoil by setting interest rates too low for too long this decade.

The forecasters gave Fed Chairman Ben Bernanke a grade of 82 out of 100 for his performance leading the central bank. Almost two-thirds said his response time to market turmoil during his tenure was "about right," while a third said he has been too slow to respond.

Two-thirds also said his predecessor, Alan Greenspan, had appropriate timing to market turmoil. But 29% of respondents said Mr. Greenspan was too quick to respond.

Among other findings from the survey:

• Housing starts are projected at 1.39 million in 2007, down slightly from last month's estimate of 1.42 million. That's seen as dropping to 1.32 million next year. Home prices are expected to drop 2.25% from the fourth quarter of this year to the fourth quarter of 2008.

• No economist sees crude oil — which hit a record $78.23 on Tuesday — topping $80 a barrel at year's end. The average projection for the front-month futures contract on Dec. 31 was $68.63 a barrel. The lowest estimate was $31.75, while the highest was $79.

• Inflation is seen as remaining relatively steady. The consumer price index was expected to rise 3% in December from a year earlier, down from an earlier estimate of 3.1%. By next June, CPI growth is projected at 2.2%.

source: 12sep2007