Gary Anderson Center Forecasts Recession in the First Half of 2008

The Gary Anderson Center at Chapman University (near LA), which does a lot economic forecasting, is projecting an economic recession starting in Q1 2008 and lasting through Q2 with a slow recovery in the second half of 2008. Text in bold is my emphasis. From Yahoo:

A recession looms for the U.S. economy in the first half of 2008 due to faltering consumer spending and nonresidential construction, which have so far helped offset the housing slump, a report released on Wednesday said.

"Some of the fundamentals that helped prop up the economy in 2007 are beginning to look shaky," said the forecast report from Chapman University's A. Gary Anderson Center for Economic Research in Orange, California.

The Anderson Center anticipates real gross domestic product will shrink by 1.0 percent in the first quarter and by 1.9 percent in the second quarter, said Esmael Adibi, the center's director.

The U.S. economy will recover in the second half, but its growth will be slow and full-year growth will only be 0.9 percent, said Adibi, adding that nonresidential construction will no longer offset the home-building downturn.

Total private construction spending will shrink next year by $125 billion, compared with an expected $91 billion drop this year, Adibi told Reuters in a telephone interview.

He sees construction payrolls thinning further along with mortgage industry and real estate services payrolls because of credit tightening in the aftermath of surging subprime mortgage delinquencies and as more Alt-A mortgage borrowers trend toward foreclosure.

At the same time, home prices will fall further, reducing the paper wealth of home owners and limiting their ability to use home equity gains to support their spending.

Consumer spending will decline in real terms by 1 to 1.5 percent in the first half of next year before rebounding with growth of about 1 percent in the second half, Adibi said.

U.S. exports will grow rapidly thanks to the weak dollar and demand from emerging markets, but that will not make up for the ripple effect of shrinking construction and consumer spending, Adibi said.

He expects a $130 billion drop next year in home-equity borrowing, which cuts into spending on big-ticket goods that often fill new homes. He also sees the recent credit tightening growing more pervasive and cutting into business investment.

Interest rate cuts by the Federal Reserve may do little to reverse the drag that will follow reduced consumer spending as long as banks hold back on credit, Adibi said.

"It's not going to cure it. It's going to help but the housing downturn will continue through 2008," Adibi said.

Adibi expects the benchmark overnight federal funds rate to be cut by a full percentage point through next year in quarter-point increments, taking it down to 3.5 percent.

The U.S. jobs market will be sleepy next year, with nonfarm payrolls expanding by 0.2 percent as the unemployment rate for the year rises to 5.2 percent, Adibi added.

The housing market slump will curb growth with foreclosures rising sharply from already-high levels, the number of unsold homes swelling more and housing starts falling for a third consecutive year to about 1.1 million, the lowest since 1991.

After a projected drop of 2.1 percent this year, the median price for the resale of a single-family detached home will decline 4.8 percent next year, Adibi predicted.

"There is further deterioration next year from this year," Adibi said. "Many people were talking about the housing market bottoming out next year, but that's not happening."