More of the Same?

DKW; September 16, 2008

Yes and no. Spoken like a true economist. Let's review the recent history. U.S. GDP was revised going back six quarters and second quarter 2008 preliminary numbers were released at the end of August. In the revision, fourth quarter 2007 was marked down to a negative 0.2% (first negative quarter in six years). Second quarter 2008 registered a positive 3.3%. The jump in second quarter GDP is attributed to the stimulus package rebate checks, narrower trade deficit, and higher exports. Exports contributed the vast bulk of the growth. Real exports of goods and services increased 13.2% in the second quarter.

Jobs numbers are falling at a measured pace and unemployment rates are rising along with unemployment insurance claims, although not at the sharp rates usually associated with a bona fide recession. Industrial production and the manufacturers and non-manufacturers indexes are wandering back and forth around neutral. Financial and credit markets are still staring into the headlights. The housing market is still in the doldrums. Real residential fixed investment decreased 15.7% in the second quarter, housing inventories are at eleven months (5 months is desired), sales are down, and prices are at best slightly positive in some locales.

So what should we expect in the next few quarters? Let take each item going from back to front. The prospects for the housing market remain bleak. Not only are houses not selling, they continue to fall in price, further sapping incentive to honor mortgage commitments and pinching the cash flows that support the downstream investment bets. Mortgage credit standards have tightened, shutting out some prospective buyers. The Treasury takeover of Fannie Mae and Freddie Mac will do little besides shove another several billion dollars of liquidity into the market, hoping to buy enough time for the housing/mortgage/credit markets to work out of the funk. More financial institutions will be scavenging for white knights to rescue them from bankruptcy or total liquidation. Some won't make it.

The bulk of U.S. goods and services have been supported by foreign demand. First-half 2008 U.S. exports were up 18% versus year-ago. Wisconsin exports were up almost 14%, led by machinery, electrical machinery, and medical devices. With the European economies weakening and the dollar strengthening, exports are likely to diminish, eliminating one of the two remaining legs supporting a wobbly economic stool. Lower export production will displace more workers. Unemployment claims and rates should continue to rise. Continued unemployment insurance claims have ratcheted up to 2003 levels, the most recent highs coming out of the last recession. Wisconsin's unadjusted unemployment rate for August was a curiously low 4.7 percent.

The remaining leg of the economic stool is consumer spending. The stimulus package checks gave a shot in the arm to consumer budgets. However, higher gasoline and food prices absorbed much of the cash flow. Noteworthy is the spending patterns following the stimulus checks. Discounters benefited (Walmart and Costco). Electronics sales increased (computers and big screen TVs). There were some savings and debt reduction as well. The stimulus checks have now come and gone as have retailers' spirits, who yet dream of a plum holiday sales burst even though consumers have less home equity to tap and shaky job expectations to supply much seasonal shopping cheer


GDP expectations for the next four quarters are not glowing. Projections are for a slow third quarter, slower fourth and first quarters, with hope for some growth in the second quarter of 2009. However, if the housing market hasn't bottomed out by then (housing is subtracting a percentage point from GDP; if housing would just stop falling, GDP would get a boost), and the credit markets aren't showing any light at the end of the tunnel, the economic lethargy could be protracted.

Inflation, running at nearly 5%, is expected to tame, although gasoline and food prices are not expected to drop substantially. The trick with inflation is that even if oil and food prices stay at high levels for a prolonged period, the high but constant prices no longer push inflation rates up. The higher costs do, however, impact consumer budgets and spending patterns. Still, if the inflation numbers drop, the Fed may lower interest rates to try to jump start the economy. As of this writing, the Fed decided to leave fed funds rates unchanged at 2 percent.

So, more of the same, yes and no.

Written by Dennis Winters, Chief Economist and OEA Administrator. September, 2008.

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