Burdened by weaknesses in the real
estate sector, the economic outlook
for the first half of 2008 is sluggish.
The housing sector, however, is expected
to rebound later in the year, providing a
boost to the economy as a whole.
One of the factors behind the recent
real estate slump was the widespread
availability of subprime mortgages.
These types of loans will be harder and
harder to come by in the future, says
Comerica’s chief economist Dana
Johnson.
“We’re not going to go back to a sub-prime mortgage market that was as wide
open and that allowed a lot of reckless
behavior on the part of both borrowers
and lenders,” he explains. “There is
going to be more of a continuing
restraint on the purchases of homes.”
Smart Business spoke with Johnson
about his economic outlook for 2008, the
impact of the subprime mortgage industry and the overall strength of California’s economy.
What is your economic forecast for 2008?
I’m expecting the economy to grow
sluggishly this winter and then accelerate over the course of 2008. I’m projecting growth over this winter — the fourth
quarter of 2007 and the first quarter of
2008 — to be around 1.5 percent at an
annual rate and then accelerate by the
end of the year to about a 2.5 percent
rate of growth.
The credit crunch has already extended and intensified the recession in housing, and housing is going to be a big drag
this winter. All of the turmoil in the credit market will also be a constraint on the
economy. For these reasons I think
we’re going to have a pretty sluggish
pace of growth for a while.
The drag from housing, however, will
slow, and we’ll find a bottom sometime
in the spring or early summer, and then
things will level off or perhaps gradually
improve a bit.
How will the meltdown of the subprime
mortgage industry affect the economy?
It’s had a very clear and direct impact
already in reducing the ability for people
to buy houses, which has intensified the
pullback in homebuilding and accelerated the decline in home prices. The key
issue beyond that is whether the decline
in home prices is going to cause consumers to spend more cautiously. So far,
there is not much evidence of a big
spillover to consumer spending. With
consumer spending holding up OK, it
looks like the spillover effect has been
limited, and this is one of the reasons
that I think the overall economy is going
to avoid recession.
Foreclosure rates have been especially
high in California. Do you believe the housing market will rebound in the upcoming
year?
No, I don’t. House prices in California
have begun to fall but are still far higher
relative to income than anywhere else in
the country. It looks to me like there are
a lot more adjustments that have to be
made in the price of houses in California relative to incomes in California relative
to houses elsewhere. California has
relied more than any other state on the
subprime mortgage market, which is not
going to fully recover for years. The
adjustments in home sales and prices
are going to continue to be very difficult
in California all through 2008. We’re talking multiyear adjustments where house
prices will not hold up as well in
California as they do in other states.
In what ways does the California economy
differ from other regions of the country?
The California economy is in many
ways a microcosm of the U.S. economy.
The distribution of jobs by industry in
California looks very similar to the
national averages in many respects.
There are two areas, however, that look
different: It has a leading position in various knowledge-based sectors as well as
the life sciences industry.
How important is the health of California’s
economy to the United States’ as a whole?
California’s economy makes up
approximately one-eighth of the overall
U.S. economy, so its health is vital. The
California economy is intimately integrated into the rest of the economy; we
don’t tend to see the sharp regional differences that we once had. The U.S.
economy’s performance is going to look
like California’s, and California’s performance will look like that of the U.S.
California doesn’t move in lockstep with
the U.S. economy but, given its size, its
diversity and the fact that the distribution of jobs is so similar to the distribution of jobs by industry in the rest of the
economy, what happens in California
tends to happen nationally and vice
versa.
DANA JOHNSON is chief economist for Comerica Bank. Reach
him at (214) 828-5970 or through the bank’s Web site,
www.comerica.com.