November 30, 2007, 2:09 pm
Growth Forecasts Head Toward Negative
October’s tepid gains for consumer spending and income, and steep declines in construction spending, are pushing more growth forecasts toward zero — or into negative territory — for the fourth quarter. A recession is often marked by two straight quarters of GDP declines, so a negative fourth quarter would likely spur many analysts to up their recession odds.
Morgan Stanley economists today lowered their growth estimate to 0.2% from 0.3% for the final three months of the year (after starting the week at 0.6%). The dip in private nonresidential construction and a plunge in parts of residential spending were “a bit worse than we assumed,” they said in a note to clients.
Nomura Securities expects the economy to contract 0.2% during the current quarter as the housing slump hits other sectors. “The erosion of homeowners’ equity, tightening credit terms, and persistently high energy costs are expected to bring a sharp slowdown in consumer spending,” chief economist David Resler wrote this week. “Meanwhile, businesses in the U.S. and abroad appear to be trimming plans for expanding plant and equipment. Thus, the slowing growth in consumer and business spending and in exports are not expected to be enough in the fourth quarter to counteract the continuing drag from housing.”
Capital Economics is projecting GDP to drop 0.5% in the current quarter. Today’s weak consumption and income figures are “as good as it is going to get,” senior U.S. economist Paul Ashworth said. “A massive surge in energy prices in November will cause a big contraction in real spending and incomes.” He’s lowered growth estimates for next year to 1.3% from 1.7% and now puts the odds of the economy slipping into a recession — with two successive quarters of negative GDP — “probably close to 50-50.”
The official recession arbiter, the National Bureau of Economic Research, doesn’t use the two-negative-quarter yardstick even though most of the recessions it has identified do contain two negative quarters. The 2001 recession had two negative quarters, though they were separated by one positive quarter, according to revised data. (The NBER’s Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”) –Sudeep Reddy
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