Some economists predict that the U.S. economy will slide into recession next year. Others expect the nation to avoid recession, if only barely. A few even think the economy will see solid growth. But for many middle- and lower-income families, the distinction will not matter.
Whether called a recession or not, the U.S. economy seems certain to slow in 2008, pushing unemployment higher and hundreds of thousands of people out of work. Surging energy costs, falling housing prices and tightening credit will punish consumers, most analysts agree, putting the brakes on spending and undermining the six-year expansion.
"We are in the danger zone," said Nariman Behravesh, chief economist at Global Insight, a forecasting firm. "It wouldn't take very much to push the economy over the edge."
The outlook is the gloomiest in years, particularly for the first half of 2008. Global Insight, for example, projects that the economy will barely grow at all in the first six months, expanding at an annual rate of just over 1 percent. Many economists expect the unemployment rate, now at 4.7 percent, to climb above 5 percent, with each tenth-point increase representing 150,000 jobless workers.
Additionally, the housing market's slide is expected to continue. Home sales could hit bottom by mid-2008, some economists predict, but prices will fall at least into early 2009. And oil prices should retreat from near-record levels but stay high, keeping the pressure on low- and moderate-income families.
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Despite this, most economists expect the United States to skirt a recession - roughly defined as two consecutive quarters of negative economic growth. Keeping the economy afloat: employers and exports.
U.S. companies are expected to keep hiring next year as stronger global demand requires them to add to their work forces, still lean in the aftermath of the 2001 recession. Hiring, however, will be cautious and at rates insufficient to keep the unemployment rate from rising as new workers enter the labor force.
Strong exports, aided by a weak dollar that makes American goods cheaper in foreign markets, should also lend support until lower interest rates spark faster growth in the second half of the year.
The U.S. Federal Reserve has cut interest rates three times since September, lowering its benchmark rate to 4.25 percent. Economists expect the Fed to keep cutting, dropping the rate to as low as 3 percent by midyear, which would be the lowest since May 2005. That should help the economy because lower interest rates encourage consumer and business spending by lowering borrowing costs.
The U.S. economy will be most vulnerable in the first half 2008, when growth is so slow that even a mild shock, like another surge in oil prices, could push it into recession. By mid-2008, Diane Swonk, chief economist of Mesirow Financial, a Chicago investment firm, said that the impact of lower interest rates should filter through the economy and lift growth to an annual rate of nearly 3 percent by year-end. But such growth rates, while solid, only tell part of the story, Swonk said.
Economic activity, benefits and losses are spread unevenly through the economy, she said, and aggregate statistics are masking hard times.
The housing sector, for example, is already in recession, and states like Florida, Nevada and California with large construction and home building sectors, are following the industry. Michigan and Ohio, battered by a shrinking auto industry, have slipped into recession, too.
Wealthy households are bearing up fine, spending at a solid clip, Swonk said. Middle- and lower-income families are struggling under the weight of soaring energy costs and sliding home equity.
"This is not a feel-good economy," Swonk said. "It may look good on paper, but for a lot of consumers it feels more like a recession than expansion."
How consumers hold up will be critical, since consumer spending accounts for about 70 percent of economic activity. So far, American shoppers have demonstrated a remarkable resilience, spending in the face of war, energy shocks and housing collapses. But now, economists worry that consumers are tiring under the weight of these problems, losing confidence and curtailing spending.
At Faneuil Hall in Boston, Linda DeMarco, owner of the Boston Pretzel Bakery, has already noticed consumers pulling back. Customers who might have spent the extra $1.50 for an Asiago cheese pretzel now order plain, she said. Families, who might have bought pretzels for each member, are now splitting them.
So far this month, business has slipped 20 percent from a year ago.
"People are very cautious with their dollar," DeMarco said. "The uncertainty about the future is definitely on their minds. You can see them thinking about it."
Nouriel Roubini, economics professor at New York University, said consumers are retrenching. Now, he says, it is not a question of the economy falling into recession, but whether it will be mild or severe.
Roubini's forecast: Severe.
Roubini predicts that the recession will last through most of 2008, and employers will shed 1.6 million jobs. Housing starts, a key measure of the housing industry, will plunge another 25 percent. National home prices will tumble until the end of 2009, plunging 20 percent from the 2005 peak.
"The worst housing recession in U.S. history is getting worse. You have a credit crunch. Oil prices are soaring. The corporate sector has stopped investing," Roubini said. "'This recession will be deeper, more protracted and severe than the last recession and the one in the 1990s."
Roubini's view is among the most pessimistic. On the other hand, Rich Yamarone, director of economic research at Argus Research in New York, predicts the economy will chug along, expanding at a solid 2.7 percent rate next year. He expects consumers, supported by a healthy job market and low interest rates, to do what they have done for 63 consecutive quarters: Spend more.
The impact of falling home values on consumer psyches is overstated, he added.
"We seriously doubt," he said, "that there's a mom pushing a child down the aisle of a Wal-Mart in Sheboygan, Wisconsin, saying 'The house is worth 4 percent less than it was last year, we're not buying any toys this year.' "
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