Economic Forecast Sees End of Free-Fall

LEXINGTON, MA-Locally based IHS Global Insight’s Forecast Flash is declaring that the free-fall of the US economy is over and should begin stabilizing in 2009. The report is looking at GDP bottoming out in the second half of 2009 after the rate of contraction slows to -2.5% in Q2 after consecutive quarters of +6% annual rates declines in real GDP. The report predicts a “3.1% decline in GDP for the year,” which is less severe than a previously predicted 3.5% decline, which should be “followed by a 1.5% rebound in 2010.” The silver lining, as the IHS sees it, is that during the back-to-back quarter declines, consumer spending experienced an uptick, helping reduce inventories.

In this vein, the rise in consumer spending topped out at a 2.2% in stark constrast with its 4.1% drop at the end of 2008. IHS points to large tax refunds and a “cost-of-living adjustment for Social Security” as the major culprits of positivity. The optimistic outlook is buttressed by a cavalry of “reduced tax withholding as of April 1, plus extra one-time payments to Social Security recipients.”

Consumers, however might want to put the champagne back in the freezer for now, though as not all the news looks good for an overall consumer recovery. The report considers “continuing steep employment declines, reduced household wealth, debt overhangs, and still-tight credit,” which leads IHS to predict flat Q2 spending, down roughly 0.4% overall.

Nigel Gault, Chief US Economist, tells GlobeSt.com that, although consumer spending will not rebound in ’09 there are a lot of government programs which will help it improve, and that although employment will be down, consumer spending may rebound before employment. “The closer we get to the bottom, the less scared people, who still have a job,” will be to spend,” he explains. Gault looks to mid to late 2010 for this to occur.

Meanwhile, although the decline of inventories is good to make space for future growth and “accounted for almost half of the first-quarter GDP decline,” the adjustment is not over, according to IHS. The economic optimist’s ubiquitous year, 2010, is seen as the year that inventories will begin rising again, says the report, as plus inventories will not be seen until the last half of ’09.

The report sees indicators that residential construction spending will being to rise by the end of ’09, essentially that home sales, housing starts and permits are experiencing a stabilization. The caveat, as evident in many deals this year, will be the credit markets. Assuming a buyer can qualify for a loan, the residential market will begin to turn around, albeit gradually and very slowly.

The big bad wolf of this year is the plunging in business fixed investment. As the report states, “the annualized 37.9% drop was the steepest on record” for Q1 of this year. Equipment orders are not affected yet by this decline, but the report expects growth to “resume by the end of 2009.” The structures side, however, is expected to “decline to extend through mid-2010,” according to the IHS report. Commercial construction and drilling activity will continue to dive, says the report, citing “overcapacity and lack of financing” and “low oil and natural gas prices” as the respective issues in those industries.

Meanwhile, exports will not be any help for the economy in the short-term. A 30% annual rate drop for exports in Q1 of ’09 shows a “global collapse in trade volumes,” the report says. IHS sees the rest of the world dragging itself up slowly from this crisis, thus hurting US exports from thriving, which will widen the trade gap later in ’09. Gault sees a flat rate for 2010, but notes that IHS is seeing slight rises in export quarter-to-quarter throughout 2010, but these are gradual and average out with current declines to “bring us back where we started.”