Economists Pessimistic, Recession Expected
Economists have become pessimistic about the U.S. economy and fear a recession in the coming months.
On April 21, the National Association for Business Economics (NABE) said that the 109 members who responded to its quarterly survey were “notably downbeat” about their first-quarter experience as well as near-term prospects. Other economists warned the nation's homebuilders that the sinking sector may not hit bottom for another year.
"For the first time in five years, reports of falling profit margins outnumbered reports of rising margins in the first quarter of 2008, while demand . . . grew more weakly than at any time since the recession of 2001," said Ken Simonson, chief economist for Associated General Contractors of America.
"Housing is still a long way off from recovery," said Nariman Behravesh, chief economist of Global Insight. Real estate economists agree that both prices and housing starts are likely to keep dropping throughout this year before rebounding in 2009.
A recession is defined as two consecutive quarters in which Gross Domestic Product (GDP) declines. NABE says that the steep drop in demand for goods and services its members reported in the first quarter "is consistent with other evidence that the U.S. economy is slowing and may be in recession." The last U.S. recession ran from March to November 2001.
Among NABE survey respondents, most cite paying more for materials in the first quarter this year and tightened credit conditions as factors that contribute to sluggish profit margins as well as economic decline. The survey respondents are cautious about hiring. While 34 percent plan to add jobs over the next six months, 23 percent plan to cut staff.
"You've got to get home buying going or this thing could spiral downward indefinitely," said David Seiders, chief economist of the National Association of Home Builders.
Mark Zandi, chief economist for Moody's Economy.com, says that lack of credit weighs very heavily on demand. As a result of the subprime crisis, private financial institutions have tightened restrictions on all potential borrowers—a void that the federal government is unable to fill.
Brought on by the housing bubble, the credit crunch is likely to change the mindset of American consumers. Jim Glassman, managing director and senior policy strategist with JPMorgan Chase, expects people to begin saving “the old-fashioned way--out of income.” Instead of refinancing mortgages to draw cash on rising home prices, consumers "will be more like our parents" and slow spending until it is more in line with income.
