Midyear Update: Economy at Mid-recession?

Some are uncomfortable with the term “recession.” They prefer the euphemism “unwanted deceleration in economic activity.”

So said Carl Tannenbaum, AM ’81, MBA ’84, vice president at the Federal Reserve Bank of Chicago. At the 56th Annual Management Conference at Gleacher Center on May 16, he moderated a panel that tried to answer such questions as, “Are we in a recession?” as it offered a midyear economic update.

Housing prices almost never decline, but they are down now, Tannenbaum said, and the reversal is impacting construction and the financial markets acutely. Mortgage standards are tightening as a consequence of the correction; with family incomes averaging $60,000 to $65,000, it’s tough to afford the 10 percent down payment for a $240,000 house, he said.

Credit conditions are still far from normal and are considerably worse than six months ago. Spreads paid by well-rated companies to borrow money remain very wide, and banks have made lending standards more restrictive, Tannenbaum said.

Growth in the GDP of .6 percent over the last two quarters are “data suggesting that we might be slipping into a recession,” said panelist Daniel G. Sullivan, director of research at the Federal Reserve Bank of Chicago. He also cited five consecutive months of negative employment growth. With most of the economy doing well over the past two years, “housing is dragging us down,” he said. Housing starts and permits totaled 1.8 million in 2006, three times what they are now. One million new single-family homes were sold in 2003, twice the current figure, Sullivan added.

With growth of disposable income down, will consumers spend much of their tax rebates? “Most of the research indicates they will,” he said.

Inflation is at 3.4 to 3.5 percent, higher than the “comfort zone” of .5 to 2 percent. “If you take out food and energy prices, you’re close to the comfort zone,” Sullivan said.

He predicted that economic growth in the first half of 2008 will be meager, picking up slowly late in the year and into 2009 as tax rebates are spent and homebuilding stabilizes.

Inflation should drift below 2 percent by 2010, assuming that energy prices level off and wage growth is low, Sullivan said.

Panelist Marshall B. Front, chairman of Front Barnett Associates, said whether we are in a recession “remains an open question.” True, consumer spending is down, employment is falling, houses aren’t selling, and consumer confidence is at its lowest since December 1973. But profits for S&P nonfinancial companies exceeded 11 per cent in the first quarter and should grow 10 percent this quarter, he said.

“These are hardly recession-like figures,” Front said. “Balance sheets are as strong as they’ve ever been. I think we have a bubble in the energy area, and I think it is going to pop.”

In addition, growth is expected in the non-manufacturing sector, which accounts for more than 85 percent of GDP. Manufacturing, meanwhile, looks to be “stalled rather than in free fall,” he said.

Front also cited a rise in factory orders, continued export growth, a reasonably low unemployment rate of 5 percent, and a “surprisingly strong” .5 percent increase in retail sales, excluding autos, for April over March.

—Gary Wisby