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A slowdown in U.S. economy, yes, but a mild one

Many economists say the stimulus plan and rate cuts will help soften the downturn.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the February 27, 2008 edition

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In the backdrop of grim economic reports, a silver lining stands out: Most forecasters say that a slowdown this year will be relatively mild.

In essence, they argue that rescue efforts, such as a stimulus package recently signed by President Bush, will help to offset – and contain – the fallout from housing and credit challenges. Americans in general will hang onto their jobs and keep spending their paychecks.

In a survey released this week, the consensus forecast among professional economists is for 1.8 percent growth in the US economy this year. Even the most pessimistic forecasters see a flat economy – with a period of recession but not an outright contraction for the whole calendar year.

To some extent, all this is cold comfort. When growth falls below normal, such a cooling has broad negative impacts even if it's not an official recession. The latest evidence came Tuesday, as Americans registered their lowest level of consumer confidence in five years in the monthly Conference Board survey.

Still, the scenario of a mild recession would mean that businesses and consumers are navigating their way, however slowly, through 2008's maze of mortgage defaults, $100-a-barrel oil, and lenders who no longer want to lend.

"The odds of a mild recession [rather than a deep one] are high," says Brian Bethune, an economist at Global Insight, a forecasting firm in Lexington, Mass. "The fiscal stimulus package … is clearly going to help."

The mild slump scenario, while not shared by all economists, hinges on a range of factors in addition to the fiscal stimulus, with its centerpiece of tax-rebate checks for consumers:

•The economy doesn't revolve only around housing and complex debt products sold on Wall Street. Those distressed areas have been focal points of media coverage. The bigger picture is how many people have jobs. In the survey of economists, released by the National Association for Business Economics, the consensus forecast is for only a modest rise in unemployment, to 5.2 percent for the year.

•Some headwinds may begin to ease. Although many analysts say the housing market will remain slow for several years to come, the vast majority of homeowners are still "above water," with mortgages they can afford and homes worth more than their loan balance. Much of the weakening in construction activity, following the boom years, has already happened.

•The country's central bank is on the case, alongside Congress and the White House. The Federal Reserve has been cutting interest rates and many analysts expect the Fed to continue easing monetary policy. The easing, over time, promises to help calm roiled credit markets, revive a stagnant housing market, and stimulate spending.

"The policy response here has been very significant," Mr. Bethune says, "both from a fiscal and monetary point of view."

His firm reckons that the US has recently entered what will be a short and mild recession. The firm sees growth of 1.4 percent for the calendar year, whereas the economy normally posts growth of 3 percent or so.

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