The speaker at our UCSD Economics Roundtable this week was Peter Hooper, chief economist for Deutsche Bank Securities. Here is a brief summary of his thoughts about the U.S. economic outlook.
Hooper thinks the U.S. has likely already entered a recession and is expecting U.S. real GDP growth to come in slightly negative for the first two quarters of 2008. His forecast calls for a sharp but brief kick out in the third quarter, thanks to the tax rebate stimulus. He calculates that $100 billion in rebates might translate into $33 billion more spending on final goods and services in the third quarter, or $132 billion at an annual rate, though Robin Moroney and Joseph Carson seem less confident. After any consumption burst, Hooper’s expecting the continuing drag from housing to bring us back to sluggish but positive growth numbers.
Hooper’s view, and I agree, is that the key uncertainty in such forecasts is how big the decline in house prices will prove to be. He guesses that for every 10% additional drop in home prices:
- household wealth falls by $2 trillion
- consumer spending is reduced by 1% via wealth effects
- financial sector losses on foreclosures increase by $50 to 100 billion
- tightening of credit conditions associated with deleveraging
could reduce GDP by an additional 1/4-1/2%
Hooper presented this impressive graph of the impact of the deleveraging so far on the once booming practice of mortgage securitization:
How big will the house decline prove to be? Hooper rightly cautioned that it is difficult to answer that question with great confidence, but offered his reasons for thinking that we might see the overhang of unsold houses begin to drop significantly over the next few quarters, which would limit further price declines.
Let’s hope he’s right. If you’re interested in more details, you can view his presentation here.