Friday, August 25, 2006

Lower Growth Forecasts

by Calculated Risk on 8/25/2006 04:36:00 PM

A couple of related stories ...

Just a few months ago most analysts were still very positive on the U.S. economy through '07. Now economists are starting to revise down their growth estimates. As an example, from Globe and Mail: Higher odds of a hard landing

The end of the U.S. housing boom will trim consumer spending, slow economic growth and set the stage for a recession in corporate profits, according to a forecast from economists at National Bank Financial.

"In light of the swift buildup of the inventory of unsold homes, it is only a matter of time before prices decline at the national level," Clément Gignac and Stéfane Marion wrote in a note.

"In our opinion, a deterioration of household net worth, at a time when the sum of the household energy bill and financial obligations has risen to a record share of disposable income, will force consumers to rebuild their savings rate."

The economists cut their U.S. 2007 economic growth target to 1.9 per cent from a 2.4 per cent projection in July-August, and lowered their expectations for personal consumption growth to 1.4 per cent from 2.3 per cent. They also raised the odds of a U.S. hard landing to 40 per cent from 25 per cent.

"This development will set the stage for a recession in U.S. profits," Mr. Gignac and Mr. Marion said.
And from the AP: Housing and fuel strain shoppers
Retailers and economists say many Americans are waiting to buy big-ticket items and cutting back on frills. Homeowners are shelving plans to remodel kitchens. Families are dining out less and tightening their budgets.

"People are taking funds from one area and committing them to another, gasoline and utilities in particular," said Gregory Miller, chief economist at Sun Trust Bank Inc. He predicts growth in consumer spending will fall from a rate of 2.5 percent to around 1.5 percent during the second half of this year, bringing down overall economic growth at the same rate.

At the same time, homeowners are seeing a key source of their wealth lose value as housing prices fall in some parts of the country.

Psychologically, this creates the opposite of the "wealth effect" that kept upbeat consumers spending as stock prices rose in the late 1990s and real estate boomed after the recession in 2001, said Robert Weagley, chair of the personal financial planning department at the University of Missouri.
The article mentions the sluggish sales at Lowe's, Wal-Mart and at several casual dininrestaurantsts. The AP article concludes with this frightening story:
... After two strong years of sales, business has slowed dramatically this summer [says] David Richardson, the 50-year-old co-owner of Rothschild's Antiques and Home Furnishings in St. Louis.

"Look around," Richardson said, gesturing to an empty store. "I'm scared. I don't know what's the right thing to do. Do you stand by the tried and true, or do you move on?"
Many people will be surprised at how quickly market psychology can change. I'm reminded of something Stephen Robinett once wrote:
"Speculative bubbles go on longer and end quicker than most people expect."