RSSRecession Probability Over 50%
The probability of a recession this year is now more than 50%. The last straw was the latest weak jobs and construction spending reports. Both were the weakest since 2003 and both were accompanied by downward revisions for recent months.
The economy all but stalled in the final quarter of 2007. Economic activity almost certainty declined in December and early data suggest another drop in January. A recession would be relatively brief and mild, similar to the last eight month recession in 2001. Monetary policy has already turned very expansionary with the 1.25% cut in credit costs by the Federal Reserve Board. Fiscal policy is also becoming aggressive with tax rebate check likely in the mail as early as May.
Recessions often begin with drops in business investment and consumer durables spending and a surge in inventory accumulation. None of these are happening now. Instead, it is the collapse in housing and mortgage markets that may push the economy over the edge into a recession. If a recession occurs, weakened consumer spending from persistently high energy prices will get credit for an assist.
It is still possible that quick monetary and fiscal stimulus and the improving trade balance may prevent a recession — but just barely. Buyer attitudes have already shifted to recession mode with the impact of this attitude change to be felt in spending and investment data in the next few months. Business investment and consumer durables spending will weaken further and may turn briefly negative. The current acceptable level of inventory will quickly become excessive requiring production cuts in the later winter and spring months.
The impact on nonresidential construction will be will be a reduction in space demand resulting a quicker weakening of rental rates and project starts and some slowing of work in process. Nonresidential construction spending, including project cost increases, has been growing at a 17% annual pace for seven quarters but is expected to slow to 12% this quarter and slip to a 7-8% pace by the end of the year. The spending decline will be slowed by the usual delays of changing economic conditions on institutional building projects.
Heavy construction spending has also been growing at a 17-18% pace but will slow to about a 10-11% pace this year. This slowdown will be due to less need — and ability to finance — private infrastructure, a less favorable funding environment for public infrastructure as the growth in tax collections ebbs and serious problems with the adequacy of funds in Highway Trust funds.
Residential construction will take yet another hit. Housing starts will drop slightly further in the next few months and stay at the depressed level of 1.0-1.1 million for most of the year. Work will slow on home under construction as contractors wait for buyers to make the finishing selections. Spending for residential remodeling will dip marginally until late in the year.
Overall, Reed Construction Data now expects total construction spending to increase only 1.4% in 2008. After inflation, this is 2-3% drop in construction activity. The current quarter is the eighth consecutive quarter of shrinking total construction activity. At least two more quarters are decline are headed. The consequences for construction materials suppliers are obvious. Overall, sales will continue to decline slowly until late in the year but his only be a further slowing of sales for materials specific to nonresidential projects.
Member Comments
If Mr. Haughey thinks it is barely possible that an improving trade balance will help prevent a recession, it is a faint hope indeed. The balance of U.S. internaltional trade in goods and services did improve for most of 2007 but in November the deficit increased to $63 billion from $58 billion in October and was higher than its previous high for the year in March.
It appears that the declining value of the U.S. dollar has not improved U.S. exports enough to counterbalance the effect of the higher costs of imports. The monetary and fiscal stimulus of which …
Contrary to what Jim Haughey says, there has in fact been a drop in consumer durables spending and a surge in inventory accumulation. The Deloitte Research Leading Index of Consumer Durables Spending declined for the fourth consecutive month. There was an especially steep decline in December. According to the U.S. Census Bureau, inventories of manufactured durable goods in December were up five of the last six months and are “at the highest level since the series was first stated on a NAICS basis in 1992.” Inventories of manufactured nondurable goods were also up three of the last four months.
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