Strategy

Warning: The Economy Stinks

GDP growth is expected to be practically nil this quarter; the debt-default rate is expected to soar.
Stephen TaubFebruary 25, 2008

More ominous warnings about the state of the economy have emerged in the past few days from a variety of sources.

On Monday, the National Association for Business Economics warned that U.S. economic growth will slow to less than one percent in the first half of 2008. Almost half of the NABE’s panel of 49 professional forecasters expect a recession to begin in 2008, though a majority of those believe the downturn will be relatively muted.

The economists surveyed look for real GDP, which grew at just a 0.6 percent annualized rate in the fourth quarter of 2007, to grow only 0.4 percent in the first quarter of 2008 and 1 percent in the second quarter.

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The second half of the year is expected to be better: 2.8 percent annual growth, bringing the total for the year to 1.8 percent. That forecast, however, is significantly worse than the 2.6 percent growth projected in November, NABE noted. For 2009, the panel anticipates real GDP to grow 2.9 percent.

“The panel significantly trimmed its estimates for consumer spending and housing, as well as cutting the outlook for inventory accumulation, while raising its forecasts for net exports and government spending,” NABE said. For example, housing starts are now projected to total just 1 million units in 2008, down one-third from the 1.5 million units forecast as recently as last May.

Meanwhile, Standard & Poor’s pointed to yet another measure that shows a growing number of companies are on shaky ground. According to the debt rater, as of Feb. 8 there were 102 companies globally identified as “weakest links” vulnerable to default on cumulative rated debt worth $42.1 billion.

The highest concentration of weakest links was seen for the eighth consecutive month in the consumer products, retail/restaurants, and media and entertainment sectors, according to S&P.

“We expect the U.S. speculative-grade default rate to accelerate substantially from near its 25-year low of 1.09 percent in January, reaching 4.6 percent in the next 12 months,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “The increase in defaults reflects the cumulative impact of the changes in the credit-pricing environment, earnings deceleration, and growing recessionary pressure in the economy.”

CFO.com reported last week that the 44 companies S&P rates as “potential fallen angels” for their BBB- debt ratings, with either a negative outlook or a negative CreditWatch listing, now represent the highest total in two years.

However, there also was some seemingly good news on Monday. Sales of existing homes fell only slightly to 4.89 million units in January from 4.91 million in December. A much bigger decline had been anticipated, according to a memo Bear Stearns sent to clients. “The relative stability in existing home sales in January is something of a surprise given the weakness in pending home sales, which pointed to a sharp decline in sales,” the investment bank said.

However, Bear Stearns warned that it would need at least one month’s additional data to assess whether January’s home sales results reflect a timing mismatch between the initial agreement to buy and the ultimate closing of the sale. “It is our assessment that it is too soon to talk about stabilization in existing home sales,” it stressed.