U.S. economic forecast for 2008: Bleak

The housing crisis and high oil prices may cause a slump, analysts warn.

from the December 28, 2007 edition

Page 2 of 2

Page 1 | 2

The manufacturing segment of the economy is already in a recession, says Daniel Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Va. Manufacturing production will fall 2 percent in the last quarter of 2007, he estimates. "Auto sales are poor. Wood products, furniture, glass, hardware are all declining, and I think there is now a snowballing on the downside that is dragging down other markets."

Dr. Meckstroth blames the housing collapse, near-record oil prices, the credit crunch, and slowing employment trends.

"One or two of these would not cause a recession, but the combination of all of them does it," he says.

He is concerned that losses in the banking system will stifle the economy. With an estimated $200 billion in losses in the housing arena, the banks need to increase their reserves, Meckstroth says. This could reduce the availability of money for new loans. "The banking system is very fragile right now," he says.

Economists expect that the Federal Reserve will continue to cut interest rates because of recession concerns. The Fed's next meeting is Jan. 29 and 30.

"I think they will cut rates but maybe more quickly and deeply if energy prices are down," says Mr. Hoffman of PNC. "But if energy prices are up, the Fed's in a real dilemma."

The computer models at Standard & Poor's indicate that the price of a barrel of oil should fall by about $20 to the neighborhood of $75, says David Wyss, chief economist at S&P.

But he is skeptical of those forecasts of lower oil prices, because prices have remained high. On Thursday, for example, the price was as high as $96.50 a barrel, up from $93 a barrel on Monday.

Analyst Jennifer Gordon of Deutsche Bank, in a message to clients on Thursday, predicted the price will soon rise above $100 a barrel as a result of political unrest, a falling dollar, and falling inventories. "Oil over $100 a barrel in the next few days," she writes.

"If oil prices remain high, it's possible retail gasoline prices could hit $3.50 a gallon nationally by July 4," predicts Mr. Wyss. Currently, regular gasoline is about $2.97 a gallon, according to GasPriceWatch.com.

Economists expect gasoline prices and the economy to become a more important factor in the election campaign. ASU's Hoffman says that, in the last two presidential elections, consumers became so distracted by the campaign that they hesitated to make major purchases.

"We call it the CNN effect," he quips. "This is going to be really tough with a fragile economy. It's not going to play out well."

1 | Page 2