Saturday, January 06, 2007

Risk of recession

Although quite a number of commentators are talking about the possibility of a recession or maybe a significant growth slowdown in 2007, the odds of a recession are so low as to not be worth worrying about. A lot of their thinking comes from a belief that the bulk of the housing retrenchment is yet to come. I do not agree with that thinking at all. I am not so positive that all of the housing retrenchment is behind us, but I do believe that the bulk of it is and that the rest of any remaining minor retrenchment will have subsided within one to four months. Meanwhile, there is a lot of reasonable strength in the rest of the economy. Even airlines and vehicle manufacturers are gradually beginning to recover from being drags on the economy in past years.

Overall GDP growth in 2007 may be a bit on the anemic side compared to "boom" times, somewhere in a range from 2.25% to 3.25% real growth, averaging about 2.75%. I am trying to be conservative there, so that actual economic performance is likely to be better than I am forecasting.

One wildcard is the rate of inflation. The headline GDP number is real growth, which is nominal growth minus inflation, so real growth could perk up if inflation comes in lower, even if nominal growth is somewhat weak.

In short: Do not expect a recession or significant growth slowdown in 2007.

-- Jack Krupansky

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