Bureau of Business Research
Date of this Version
We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America.
In some sense, the answer does not matter. The United States and its citizens already are experiencing some of the consequences of recession, and of higher inflation. Job counts are declining and unemployment is rising. Many face the prospect of losing their homes. Prices including food and energy are rising 2% faster than in most recent years.
But, of course, the answer matters quite a lot. If the U.S. economy falls into recession, or if a recession has already begun, job losses will accelerate and unemployment will rise sharply. The real estate and financial markets may spiral down faster. There is also a risk that prices increases will accelerate if inflation in food and energy spreads into wage inflation impacting a broad spectrum of sectors.
Our view is that the economy will avoid both a significant recession and rapid inflation. Strong exports will encourage growth, and consumers and the financial sector will slowly work their way through their current difficulties. Inflation largely will be contained to the food and energy sectors. But, the scenario is far from rosy. We expect weak economic growth through 2008 and early 2009, and elevated inflation rates through 2010. In particular, we expected annual growth in real GDP of 1.1% in 2008, 1.7% in 2009. GDP growth rates only returns to trend growth of 2.8% in 2010. Inflation will hit 4.0% in 2008, and will be well above 2% in subsequent years, at 2.6% in 2009, and 2.7% in 2010.
A significant slowdown will be avoided because the weak dollar will encourage strong exports, and because consumer spending will expand modestly despite a weak employment situation and high energy prices. Consumer confidence has declined rapidly but consumer spending should stay steady thanks to lower interest rates, and in the very short-term, federal government rebate checks. Current high energy prices also are expected to stabilize, and therefore, will not cause even further strain on consumer spending for other goods and services.
This relatively positive scenario naturally assumes that the U.S. economy will avoid other major dislocations. The economy may fall into a significant recession if there are other major disruptions in the financial system that limit access to capital. Inflation may spike further if oil prices rise or additional weather causes further increases in food prices.
Published in Business in Nebraska, Volume 63, No. 691, June 2008. Presented by the UNL Bureau of Business Research. Used by permission.