"Healthy export growth and continued business spending will help the economy steer clear of an outright recession, but I believe that won't be significant enough to prevent an economic slowdown in 2008," said Scott Anderson, who holds a doctorate in economics with an emphasis in monetary theory and international trade and finance. "Rapidly cooling earnings growth and rising economic uncertainty will make US companies reluctant to undertake ambitious expansion plans in 2008."
In further explaining the optimism, the company's chief investment strategist Jim Paulsen said the stock market is within 5% of all-time highs and eight out of the 10 economic sectors in the S&P 500 are up 6% or better, which has given a 4% bond yield. In addition, he said more than 95% of people in the US who want to have a job have one and they're still spending.
"Retail sales for the first two months of the last quarter were better than expected and the global economy has more contributors to growth than ever before," Paulson said. "The big story here is that while housing spending has taken a full percentage point off real GDP growth, it's been totally offset by a percentage point gained in trade. For the first time in about 15 years, export growth is adding to real GDP growth, and it will continue as the dollar continues to weaken."
Wells Fargo senior economist Eugenio Aleman said inflation is the most pressing problem for the Federal Reserve today. "The rate of inflation has been increasing the past several years [and] such increases take a long time to build into the system, into expectations, into our daily lives. And once they do, it's very difficult to get rid of the problem," he said. "The longer we take in slowing down inflation, the more difficult and risky it gets for the Federal Reserve and the economy."
With regard to consumer spending and labor, the economists predict consumers will feel somewhat "tapped out" after the holiday season, which will affect their spending behavior. He forecasts a 1.8% growth rate in consumer spending next year, down from 2.8% in 2007.
"The interest rate pain relievers prescribed by the Fed will take at least six months to take effect and may not be strong enough to deaden the financial pain," Anderson said. "Tighter credit and lender standards are playing a role, but the primary driver of the weakening consumer is the labor market, with payroll growth down to a paltry 0.8%."
Anderson forecasts a 5.1% unemployment rate by the third quarter of 2008 and says a rising unemployment rate could magnify housing and consumer spending problems. "Many Americans appear to be one job loss away from mortgage default and bankruptcy," he said. "If unemployment rates rise more than expected, banks would respond by further restricting credit, home prices would fall below current expectations of a 10% national decline, and we'd see a downward spiral in the economy."
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