SAN DIEGO - The American real estate market has been in a recession for two years, but at least one economist believes it may be near bottom–which should allow the overall economy to recover by the end of this year.
Joe LaVorgna, chief U.S. economist in charge of global markets research for Deutsche Bank, told attendees of WesCorp’s Future Forum conference here he foresees negative GDP growth for the second (current) quarter of 2008, followed by a “rebate boom” in the third quarter as consumers spend their economic stimulus checks.
“The traditional definition of a recession is two consecutive quarters of negative GDP growth,” he said. “Whether we call what we are in a ‘recession’ remains to be seen, but if it is a recession it is very, very mild by historical standards.”
The U.S. economy also suffered through “mild” recessions in 1990-91 and in 2001, LaVorgna explained. He noted the index of leading economic indicators, which includes housing, labor and manufacturing, still is pointing downward. In addition, financial institution balance sheets are contracting, which he said has always been consistent with a credit crunch.
“There are still some liquidity issues that have not manifested themselves,” he warned. “But, capital spending and inventories are two sectors typically most affected during a recession, and they are in good balance. This should limit recession going forward.”
LaVorgna expressed concern about consumer spending, which he said has reached a historically high percentage of GDP: 70%. With consumers taking hits from several sectors, any pullback could negatively impact the economy.
“Consumer spending is still trending downward,” he noted. “Household buying power is significantly diminished, especially by falling homeowner equity. Tax receipts suggest wage growth is slowing quickly. Elevated energy prices continue to pose a big risk to growth. People might use their tax rebate, effectively, to fill up their cars.”
On the negative side, LaVorgna said housing inventories remain high, and food price inflation remains elevated. Balancing those factors are two pieces of good news: as the U.S. dollar has depreciated over the past several months it has led to rapid growth in net exports of American products; and, the most recent Producer Price Index suggests a “leveling off” in food prices.
“I do not see the economy going into a deep freefall,” LaVorgna declared. “Real estate has been in recession for two years, and it can only go so far. Coming out of this slowdown, it will be a jobless recovery for at least one year, just like the recovery from the 2001 recession created very few jobs.”
