Economic Growth to Slow on Credit Market Uncertainty and Housing Contraction, Pick Up Pace in Second Half

Members of the Securities Industry and Financial Markets Association²s Economic Advisory Roundtable expect the pace of U.S. economic growth to slow in the first half of 2008 but pick up in the second half of the year. In the year-end survey, the median forecast anticipates GDP to grow but at a below-trend pace of 2.1 percent in 2008 as the economy works through the housing sector contraction and the effect of credit market turbulence.1 In addition, the median forecast has GDP growth in the current quarter dropping sharply to 0.9 percent. Housing sector deterioration, tight financing conditions, an accommodative monetary policy response to the credit market environment, a projected decline in the price of oil, and the combined effect of a lower dollar and global economic expansion provide the backdrop for the economic outlook. Employment and personal income trends are the principal drivers of consumer spending growth, but the weaker housing market, reduced credit availability and curtailed employment growth are also expected to dampen consumer spending. Business capital spending growth is expected to be slightly lower than the 2007 level, benefitting from solid corporate balance sheets and cash flow accumulation, but well below the growth rates of recent years.

The unanimous opinion of the Roundtable is that the FOMC will reduce the target Fed funds rate by 25 basis points to 4.25 percent at the upcoming December 11 meeting. While agreeing that the Fed will cut rates by 25 basis points, some respondents indicated a preference for a 50 basis point cut this time in order to open up the money and credit markets. Furthermore, the majority of the panelists expect the FOMC to continue to cut rates through the first half of 2008. The median forecast has the Fed funds rate at 3.50 percent at the end of the second quarter. Although the panelists expect the accompanying statement on December 11 to provide for flexibility, the strong consensus is that the policy statement will emphasize risks to growth while noting the presence of inflationary risks. The statement is also expected to acknowledge the current difficulties in the credit markets.

Other Questions

• Credit Crunch and Prolonged Housing Slump Dominant Growth Risks; Housing Contraction to Continue Into Late 2008 and 2009
• Sunsetting Reduced Capital Gains and Dividend Tax Rates Reduce Economic Growth, Asset Values
• Corporate Profit Growth to Slow; Margins to Decline Modestly
• Divergent Opinions on Corporate Bond Credit Spreads
• Equity Prices Expected to Rise in 2008

About the Report

A semi-annual survey of SIFMA’s Economic Advisory Roundtable concerning the U.S. economic outlook and rates forecasts.

Credits

SIFMA

• Staff Advisor: Steven Davidson

SIFMA Economic Advisory Roundtable 2008

• Chair: David H. Resler, Nomura Securities International, Inc
• Vice-Chair: Jim Glassman, J.P. Morgan Chase & Co.