Market and economic predictions for 2008

About the only safe predictions I can make about the market and economy in 2008 is "anything goes" and "all of the above." Seriously.

I am fairly confident that the economy will not fall into recession (as determined by the NBER Business Cycle Dating Committee), but there is enough uncertainty in credit markets that it is a possibility. On balance, I will predict that we will avoid recession in 2008.

I can with great confidence predict that the stock market(s) will... gyrate wildly throughout 2008. Whether the stock markets finish 2008 higher is a real crap shoot. The stock markets have risen recently in anticipation of economic improvement in 2008, but the markets will end 2008 based on expectations for where the economy will be headed in 2009. I continue to predict that the stock markets will overall trend modestly higher over multi-year periods, but we could also see temporary downward trends at shorter time intervals up to a full year or even 15 months due to the vast amounts of short-term "hot money" being deployed by hedge funds, in-house trading desks at banks, and like-minded speculators. Nonetheless, I will go out on a limb and predict that the stock markets will close out 2008 modestly higher, a gain of between 5% and 15%. OTOH, if markets do in fact decline, it will be no great surprise.

I can with great confidence predict that the euro will... be quite volatile throughout 2008. It may continue to climb and hit $1.50 or even $1.65, but is just as likely to pull back. I will predict that the euro will decline as the U.S. economy creeps back to health and interest rates rise again. I predict that the euro will close out 2008 closer to $1.20.

Speculators may in fact finally succeed in pushing crude oil up to $100, but such efforts will ultimately backfire as the high price for gasoline and other refined products will continue to strongly incentivize consumers and businesses to seek alternatives that reduce their demand for such products, with the net effect that there will be a weakening or even outright decline in real demand growth for crude oil in the coming year. On the one hand, there is a good chance that speculators will continue to push crude oil up beyond the level supported by real demand, but I will go ahead and predict that crude oil will close out 2008 closer to $50 than $100. Retail gasoline prices will pull back somewhat, but not dramatically, maybe to the $2.50 to $2.75 range. I'll go ahead and predict that retail gasoline will close out 2008 closer to $2.50 than $3.00.

Demand for gold is quite irrational to say the least, so it could spike higher, but I strongly suspect that the speculative interest will decline as the Fed succeeds at getting the economy and financial system back on an even keel and pushing inflation down a bit more. Although I wouldn't be surprise to see gold spike to $875 or even $900, I will go ahead and predict that gold will close out 2008 closer to $700.

I predict that the housing market will roughly stabilize in 2008, although some sub-sectors will show continued weakness while other will start bouncing back.

I predict that nonresidential construction may see a pause as projects financed before the credit crunch are completed, but then we will see a resurgence of nonresidential construction for the rest of 2008 as credit markets recover and large amounts of credit become available from "alternative sources."  Noveau investors from China, Russia, and other emerging economies, not to mention growing sovereign investment funds will find investment in high-profile U.S. construction projects to be irresistible. Also, there is a huge inventory of "tired" and "dated" properties in the U.S. that are ready for renovation and offer quick returns.

I predict that overall employment will continue to rise in 2008, driven by healthy gains in service-based and export-based businesses.

I predict we will see a resurgence of U.S.-based manufacturing as the backlash against imports begins to grow and technology advances, rising transportation costs, and rising wages and benefits in emerging economies enable manufacturers to produce at least niche products more effectively here in the U.S. Net U.S. manufacturing may still see a decline, but the list of growing sub-sectors will expand.

Inflation will be extremely volatile in 2008, especially as the prices of commodities are driven by trigger-happy speculators and as the Fed starts hiking its target rate again, but overall inflation will start to trend down again in 2008. I predict that core inflation will be in the 1.5% to 2.5% range for 2008. I predict that headline inflation will be in the 2.0% to 4.0% range for 2008.

Real GDP is driven not only by nominal economic growth, but by headline inflation as well, so significant volatility is to be expected. For example, the economy was probably weaker in Q3 of 2007 than in Q1, but a temporary spike in the headline inflation reading led to real GDP growth in Q1 looking to be much lower than in Q3. I predict that overall nominal GDP growth in 2008 will be 4% to 7%, meaning inflation-adjusted real GDP will be in a range of 0% to 5%, with 2.5% being the likely level of growth over 2008.

-- Jack Krupansky