Bernanke essentially said he’s expecting 2% real GDP growth for the first half of 2007, with ongoing drops in housing investment bringing total GDP growth down to these modest levels. But Bernanke is not without his worries:
This forecast is subject to a number of risks. To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far. The possibility that the recent weakness in business investment will persist is an additional downside risk. To the upside, consumer spending–which has proved quite resilient despite the housing downturn and increases in energy prices–might continue to grow at a brisk pace, stimulating a more-rapid economic expansion than we currently anticipate.
Initial signs of that spillover are what caused me to turn decidedly bearish last month. I should acknowledge that we’ve seen some modest improvements this month in a few of the numbers that had me worried. I was greatly concerned when January’s drop in the index of industrial production brought that series to a 6-month low. But the recently announced February gain in industrial production brought it back up to an all-time high:
I also fretted much (and in this was hardly alone) at January’s 8% drop in new orders for durable goods. Today’s announcement that these orders were up 2.5% in February therefore has to bring some cheer, though that still leaves this measure below the values of 6 months or a year ago.
A third concern had been January’s 6% drop in new orders for nondefense capital goods (excluding aircraft), which had brought this series to a value lower than any month of 2006. No comfort there in today’s release, which reports that this series fell an additional 1.2% during the month of February. It’s hard not to be a pessimist if nonresidential investment follows residential investment down.
These ups and downs should remind us all that it’s easy to read too much into one month’s swing in any of these series. But that also means it is hard to recognize the downturn until it’s fully upon us. So, while Bernanke is technically correct to state that
thus far, the weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy
I can’t take a lot of comfort in the extent to which these spillovers are not yet judged to be “significant”.