Economy Has Further to Fall,
According to Economists' Survey
Bernanke, Paulson Grades Still Low,
Despite Getting Thumbs Up on Bear Deal
By PHIL IZZO
April 10, 2008
The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey.
By a 3-to-1 margin, respondents said the economy is in a recession, and almost three quarters said the economy hasn't yet hit bottom. "It's hard to say," said Lou Crandall of Wrightson ICAP, since "it doesn't feel like anything we've experienced in decades."
WSJ's Phil Izzo discusses the results of a survey of economists where further declines were predicted. They say housing, credit and consumer markets are the most uncertain. (April 10)
The survey was the first since the Federal Reserve's intervention to save Bear Stearns Cos. from bankruptcy. The vast majority of economists -- 80% of the 46 who answered the question -- approved of the Fed's handling of the Bear situation.
That didn't translate, however, into high marks for Fed Chairman Ben Bernanke or Treasury Secretary Henry Paulson, who also was closely involved in the deal. The Fed chairman's grade rose slightly to 78 out of 100 from a 75 in February, the last time the question was asked, but is still far below 92 he scored in September. Mr. Paulson's grade dropped slightly to 73 from 74 in February. "Bernanke has been too slow," said David Resler of Nomura Securities.
David Wyss of Standard & Poor's Corp. said the Fed was behind the curve through most of last year, moving too slowly in dealing with the credit turmoil, but it has caught up since January. The central bank's unconventional moves are "better than sitting there and watching the world fall apart because you don't have the perfect solution," he said.
CHARTS AND FULL RESULTS
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See and download forecasts for growth, inflation, housing and more. Plus, grades for Bernanke and Paulson, reactions to the Bear Stearns deal and more. Survey conducted April 4-7.
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Three interrelated issues are weighing on the economists' minds. When asked what the biggest downside risk to their forecast was, 35% chose further deterioration in the credit markets, while 25% said it was a sharp drop in consumer spending and 13% said continued housing weakness. Differing opinions on these issues played a big part in the assessment of whether the economy had hit bottom.
Richard DeKaser of National City Corp. was among the economists who think the nadir has been reached and that the economy will soon start to recover. "First, we've begun to see some stabilization in existing- and new-home sales," he said. "Second, the uncertainties plaguing the credit markets are beginning to narrow. And third, the policy actions taken by the government [the economic stimulus package and Fed rate cuts] will begin to take effect soon."
Mr. Wyss isn't convinced. "Home prices are still diving," he said, adding, "I won't believe that home sales have stabilized until we see the spring numbers. That's when activity picks up." He also suspects that consumer spending will slow further because of the economic turmoil.
ABOUT THE SURVEY
The Wall Street Journal surveys a group of 55 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see: WSJ.com/Economists.
Ian Shepherdson of High Frequency Economics agrees. "I expect soft consumption will keep growth way below trend right through next year and I would not be surprised by a soft 2010 either," he said. "You can't party for a decade, stop on Saturday and expect the hangover to be gone by Sunday lunchtime so you can go out and start all over again."
One area supporting the point on consumption is the employment outlook. After three consecutive drops in nonfarm payrolls, the economists now expect the economy to shed 1,625 jobs a month, on average, over the next year. They expect the unemployment rate, now 5.1%, to rise to 5.6% by December. Meanwhile, just 21% of economists expect home prices to hit a bottom this year, while 67% see the bottom in 2009 and 12% say it won't be until 2010.
While most of the respondents say the economy hasn't hit bottom yet, they see the low point in the not-too-distant future. They expect gross domestic product, which grew at a slim 0.6% annual rate in the fourth quarter of 2007, to expand, on average, by an anemic 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter. Most of the economists expect a contraction in the first half of this year, but those expecting growth push the average into positive territory.
Consistent with their view that the economy will hit bottom soon, the economists expect the Fed to trim its benchmark federal funds rate by another half-percentage point from the current 2.25% by June -- and then to keep rates unchanged for the rest of the year.
Mr. Wyss of Standard & Poor's offered some hope for investors. "I do think the stock market has hit bottom," he said. "It usually bottoms out three to four months before the economy."
Write to Phil Izzo at philip.izzo@wsj.com |
