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United States Economy


Down the US economy goes

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Hazel Heyer l Special to eTN  Jun 16, 2008

Three top US economists have shed light on several issues that plague the country. There all agree that 2008's outlook is bleak.

Few good news have been outnumbered by many worst expectations within the coming months. Bjorn Hanson, principal, PricewaterhouseCoopers looked at the hotel industry from the fuel standpoint. “When real gasoline prices increase by 10 percent, the US lodging demand declines by 0.5 percent. If real gas prices had remained at 2006 fourth quarter levels, occupancy in 2007 would have been greater than .2 occupancy points. If real gas prices remained at 2007 levels, occupancy in 2008 would be 0.4 percent occupancy points,” he said.

David Wyss, chief economist, Standard & Poor’s said, “The recession should be mild because of the fiscal and monetary stimulus, but it may be probably long. A deeper recession is possible if the financial markets remain locked up.”

Wyss thinks oil prices will continue to rise and home prices will continue to drop further.

He explained home prices were too high before 2007, considering the ratio of average home price to average household disposable income. The housing market has been in recession for two years, subtracting over a percentage point from GDP growth in 2007 – which was offset by the strength in non-residential build-up and the closing of the trade gap. As much as minus 3 percent or worse from last year was posted by a few states in terms of change in home prices in the first quarter of the year according to the OFHEO’s report for 2008. Existing homes have dipped 17.5 percent according to the National Association of Realtors while new homes have gone down by 13.3 percent in March 2008 compared to last year, according to the US Commerce Department. The record high foreclosures are seeing 1 of every 194 homes in some stage of foreclosure, nearly 3 million foreclosed properties will go on the market this year and next, and that 9 million borrowers are under water, Wyss detailed.

Home construction alone contributes 5 percent to GDP. With the housing bubble bursting, homebuilders who hire 11 percent of the total US work force threw a lot of Americans back into the unemployment pool.

Today, even non-residential construction is beginning to decline as well. The Fed has cut rates sharply, and is done cutting this year. Rates have plateau’d at 2 percent.

“People behave the same whether the economy shrinks by 1 percent or grows by 1 percent. But bear in mind, consumers have cut spending tremendously,” said to the executive director of The Economic Outlook Group Bernard Baumohl. He added, “Household incomes cannot keep pace with inflation. Household wealth is on the decline, making people feel poorer now than a year ago.”

The double-dip recession in housing and the credit crunch follows a real death spiral.

If the costliest natural disaster in US history was Katrina costing $80 billion in damages, and the most catastrophic attack on US soil was 9/11 costing $50 billion, the losses and write-downs from the sub-prime mortgage disaster is a whopping $379 billion. From the calculations by the IMF, the total cost of the sub-prime mess will total $ 945 billion when all the numbers will have been added, said Baumohl.

Credit is still scarce. However, the good news is housing will bottom out early in 2009. There may be a second economic stimulus to occur in 2009, reported the Economic Outlook expert. Lenders will loosen up and will be reluctant to foreclose. Home affordability will be at its highest in 5 years. Pent-up demand for houses will build up due to this. Households are just in the process of de-leveraging in a way.

We’re more than halfway through the downturn, according to Wyss. But the way out is not straight up. Recovery will be very slow however, and the job market will continue to remain very weak. The unemployment rate will remain historically low with applications for jobless benefits below recession levels, expects Baumohl.

Lenders will remain cautious issuing loans and home prices will appreciate only at a modest pace. The Feds has moved aggressively to improve conditions in the financial sector, with interest rates spreads narrowing – with the result of the credit freeze expected to slowly start to thaw in mid-second half of 2008. It will look better in mid- 2009.

Non-residential spending has remained high at over $650 billion while residential continues to plunge. Lodging construction activity has spiked up in March 2008 to $36 billion from $32 billion in February 2008.

Sad to say, Baumohl said regular gas price will peak at $5.00 per gallon within 1 to 2 years. He also warns that in the coming 24 months, there may be 1 or more major lenders to fail, oil will reach $200 a barrel and that the dollar will continue to depreciate, going a step down and sliding further from 1.61 to 1.68 euro to a dollar. Hanson believes despite the declining dollar, weaker overseas growth will mean less benefit from the trade deficit.

World growth remains solid, said Baumohl. “But the slower growth in the US and urope is offset by stronger growth in Asia. The train has more engines attached. And the world is thus less dependent on US growth. We expect a slight slowdown in world growth to 3.9 percent from 4.9 percent in 2007. But the big trade and capital imbalances are a risk. And higher oil prices could still growth more,” added the economist.

On the international front, Baumohl expects major shocks. With about 60 percent accuracy, he said that Hamas and Hezbollah will deploy longer-range missiles. The Lebanese civil war will spark (at 50 percent accuracy), a military strike against Iran’s nuclear facilities will take place (with 65 percent probability), and that the biggest terrorist attack on Saudi Arabia’s oil facilities will occur given a good probability 75 percent by Baumohl.

Down the US economy goes
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