By Jesse Herman, contributing editor
The International Monetary Fund (IMF) has scaled back on their U.S. economic growth forecast by .7% and a 1.1% decrease from 2006. An abrupt change in the weakened subprime home mortgage market is being singled out as the #1 culprit.
In September, IMF predicted a 2.9% expansion in the U.S. Economy but has now adjusted it to a 2.2% growth estimate. In 2006, growth was at 3.3%.
The IMF reported in its twice-annual World Economic Outlook:
“A growth pause still seems more likely at this stage than a recession. The expansion is expected to gradually regain momentum, with quarterly growth rates rising during the course of 2007.”
Interestingly, IMF maintained its 4.9% global growth forecast despite the U.S. economic woes. This marks the first time in four decades that the world economy muscles ahead without help from the perennial economic superpower.
For the first time since 2001, the U.S. does not lead Europe in terms of growth. In fact, this is the first year since 2003 that the U.S. did not lead the Group of Seven nations in growth, falling behind the U.K., Canada and Japan.
Bloomberg-Los Angeles Times Survey Indicates Pessimism among Citizens
A poll of 1,373 adults was taken and found that 60% of those surveyed said a recession was somewhat or very likely within the next year. The last time the L.A. Times conducted a survey on recession was in 2000. 64% said a recession was likely and three months later a recession began.
35% of these people said their personal finances were “shaky,” the second highest reading for those with that view since the survey began in the early 1990’s.
This does not reflect the views of most economists, namely Federal Reserve Chairman Ben Bernanke, who says a recession is unlikely. Still, it demonstrates an overall economic concern amongst Americans.
This anxiety outlines another fear that consumer spending could drop, stifling growth in the U.S. economy. Consumer spending accounts for more than two-thirds of the nation’s economic activity. A low unemployment rate should help offset this concern. It is currently at 4.4%, the lowest in five years.
Housing Industry
It is the housing industry that raises the greatest concerns for the U.S. economy. Sub-prime and secondary lending practices became too “loose” from 2001-2006 and a bleed-over affect is feared. Foreclosure rates have skyrocketed and there are a slew of unsold homes in the hands of contractors. Tightened lending restrictions do not help reduce the glut of homes at all.
Given all of that, most industry experts predict the worst of the housing downslide has passed.
The IMF report detailed a number of the influential economic influences in terms of the U.S. and the rest of the world. They summarized many of these factors with the following:
“Particular concerns include the potential for a sharper slowdown in the United States if the housing sector continues to deteriorate; the risk of a deeper and more sustained retrenchment from risky assets if financial markets continue to be volatile; the possibility that inflation pressures may revive as output gaps continue to close, particularly in the event of another spike in oil prices; and the low probability but high cost risk of a disorderly unwinding of large global imbalances. From a longer-term perspective, a number of trends—including the aging of populations, rising resistance to increasing globalization, and the environmental consequences of rapid growth—could undermine the buoyant productivity that has underpinned recent favorable outcomes.”
