Hampered by a steady rise in energy
prices, a downturn in the housing
market and woes in the credit market, the U.S. economy has been sluggish
throughout the first half of 2008. The good
news, however, is that despite this confluence of negative economic indicators, the
economy has shown growth.
“The U.S. economy has been remarkably
resilient,” says Dana Johnson, Comerica
Bank’s chief economist. “It has grown
nearly 1.5 percent at an annual rate over
the first half of the year, despite a rise in
energy prices, a fall in housing prices and
a consistently disturbed credit market.”
Smart Business spoke with Johnson
about his economic outlook for the coming months.
What is your economic forecast for the
remainder of 2008 and moving into 2009?
The second half of 2008 is going to look
a lot like the first half where growth averaged about 1 percent on an annual rate. As
we move into 2009, I see the economy
accelerating gradually. Six months from
now I think the problems with the credit
market will be less intense and the credit
crunch will be less evident. I also think by
the time we reach the end of the year we
will have seen a partial reversal in the runup of energy prices — particularly crude
oil and gasoline.
We’re beginning to see more evidence
that the plunge in building activity is
beginning to slow and perhaps the bottoming-out process is underway. The drag
from home building is going to become
smaller as we move through the second
half of the year into 2009. Finally, I think
we’re going to continue getting good support to the economy from a narrowing of
our trade deficit in real terms. The weakness in the dollar has been underway for
about six years and decent growth abroad
helps the trade deficit continue to be a
source of support for the U.S. economy.
Do you anticipate continued turmoil in the
financial and housing markets?
In the near term I certainly do. There are
still tremendous concerns about the size
of the losses that may result from further
defaults, and there is no sign yet of a peak
in default rates in mortgages. Until we see
clearer evidence that the home price
declines are beginning to subside, there is
going to be a lot of concern about the condition of financial institutions that, in one
way or another, are exposed to the housing market.
California has relied heavily on the subprime
mortgage market. What impact will this have
on housing prices in the state going forward?
House prices have already declined
quite sharply, particularly since last fall,
when the credit crunch cut off the flow of
new jumbo and subprime mortgages. The
decline in home prices has been sharper
in California than in most other parts of
the country. Over the next year, California
home prices are probably going to under-perform against the national average by
10 percent. We are seeing a much more
rapid adjustment in home prices in
California in this episode than we did in
the first half of the ’90s. In the past, adjustments have taken quite awhile, but this
one is progressing quite quickly.
Do you expect oil prices to continue rising?
I have given up believing that I can forecast the near-term movements. I do
believe that we have been in an overshoot
episode. I also believe that any retracement in energy prices is likely to be quite
modest compared to the run-up we’ve
experienced over the past six years.
How will this impact the economy as a
whole?
The spike in energy prices has created
tremendous hardships for any heavy user
of petroleum-based products. Overall, the
energy price increases have created a
drag equal to about $100 billion this year
as compared to last year. This figure
matches the order of magnitude of tax
rebates that people have received.
Without the tax rebates there would have
been a much more visible impact of the
run-up of energy prices on the economy.
One of the bright spots in the current U.S.
economy is exporting. Do you expect this
trend to continue?
Yes, I do. The dollar has been going sideways since March. It’s beginning to stabilize and when the Fed starts tightening,
which I expect to happen sometime next
year, I wouldn’t be surprised if the dollar
begins to firm a bit. The dollar is very low
compared to what it was a year ago, or six
years ago, and is creating a good, competitive position for anybody producing
goods and services in the U.S. and trying
to sell them abroad. Growth abroad has
slowed, but not as sharply as it has in the
U.S. The combination of growing incomes
abroad and the low value of the dollar signals that we will continue to see good
growth in our exports in the coming six to
12 months.
DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 462-6839 or [email protected].
