- U.S. GDP grew fractionally in 1Q 2008, with final sales to domestic purchasers falling for the first time since 1991. Weak consumer spending, a dramatic shift to decline in business investment, continued rapid declines in residential investment and even a slowing in state and local government purchases were notable contributors. Modest decline in domestic final sales should continue this quarter. With inventory declines also likely, market looks for a modest outright GDP decline this quarter.
- While home prices have declined rapidly in recent months, many indications of financial turmoil have receded somewhat, partly in response to the Fed’s creative mechanisms for enhancing financial market liquidity, including a facility for lending directly to primary dealers. Consistent with credit improvement, major equity indexes have retraced part of their early-year declines. However, weakening labor markets will likely continue to weigh on consumer credit quality, and financial institutions are likely to maintain tight lending standards. How these disparate trends combine to influence the degree of business caution on capital spending and hiring is a key to the depth and persistence of the economic slowdown.
- Market expects below-trend 1.5% to 1.75% annualized consumption growth this year, as households face slowing payrolls, falling home prices, tight credit conditions and record energy costs. At the same time, the Fed’s aggressive monetary easing and the temporary tax rebates should have an increasingly stimulative impact in the second half of the year.
- Amid slowing final demand, weakening profits and rising costs of capital, firms have reduced their capital spending plans. Provision in the stimulus legislation for the expensing of equipment purchases this year is providing some offsetting support to capital spending. Business investment in nonresidential structures declined last quarter, following robust growth in 2007. State and local government purchases are likely to be increasingly constrained by weakening tax revenues.
- Home sales are likely to level off later this year, as affordability continues to improve and credit conditions ease somewhat; however, declining home prices are also a key deterrent to housing recovery, as potential homeowners respond by postponing purchases. Even after home sales level off, near-record inventories of homes for sale will delay a pickup in construction. Rising net exports, the result of sustained economic growth in Europe, robust emerging market economies and the significant declines in the U.S. dollar, will continue to add to GDP growth. However, with foreign economies not fully decoupled from the U.S. and showing their own signs of slowdown, net exports are also vulnerable.
- The Fed’s aggressive easing has lowered its funds rate target by 325 basis points to 2% since last September. Amid considerable anxiety at the Fed over the impact of its aggressive easing on its inflation-fighting credibility, reflected in the multiple dissents at recent meetings and exacerbated by rapid dollar weakening and commodity price surges in April, the Fed hinted at a less aggressive approach going forward. While it will likely remain on hold in June, market expects further moderate easing to 1.5% later this year, as below-trend economic growth implies continued labor market softness and a gradually rising unemployment rate.
U.S. Economic & Financial Forecast—May 2008
May 5th, 2008 · No Comments
Tags: United States US Economy
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