While the debate continues to rage over the state of the U.S. economy, Dan North, chief economist for Euler Hermes ACI, a trade credit insurer, says the nation's economic landscape is likely to rebound in the fourth quarter of 2008.
"Whether the U.S. economy will enter into a recession or not still seems to be the big question for debate among economists, analysts and politicians. I believe that the economy will not go into a recession; I believe that the economy is almost certainly in a recession already," said North, who had been forecasting the current economic slowdown since early in 2007.
North explained that for some time several major factors have been at work slowing the economy, including high oil prices, the lagged effect of monetary policy tightening and the myriad problems associated with the burst housing market bubble. "With all of these forces acting at the same time, the resulting indicators of the economy's health have predictably faltered. Fourth quarter GDP grew at an anemic annualized rate of only 0.6%, housing prices are in a continued slide, holiday sales were terrible, delinquencies and foreclosures are soaring, hundreds of thousands of jobs have been lost in the housing and finance sectors, and perhaps most tellingly, January's jobs report showed negative growth, a virtually certain sign of a recession. In addition, policy reactions out of Washington have confirmed the oncoming recession with the creation of a $168 billion stimulus package, and a whopping 125 basis point cut in the Fed Funds rate in January alone. Also, in the Fed's January minutes, the word 'downturn,' which is a euphemism for 'recession,' was used twice, and former Fed Chairman Greenspan recently said that there was a '50% or better' chance of a recession, which was probably a deliberate understatement to not cause panic.
"So the real question is, since a recession is here, what happens next? It's likely that the recession will end when the housing market stabilizes and when monetary policy easing takes full effect. Housing executives seem to have a consensus that the housing market will likely come out of its slump by late 2008 or early 2009. The Fed started cutting interest rates in September of 2007, and since these actions usually take around a year to work, it is likely that their stimulus will fully kick in around the fourth quarter of 2008 as well. Therefore it would seem that in the worst case, the economy might suffer two or three quarters of negative growth in 2008, with signs of recovery emerging by the end of the year.
The economy rides the business cycle, and it is now on the downside of the business cycle, entering recession. But the up side of the business cycle is coming too. We just have to wait a few quarters for it."