Mixed economic signals have everybody-- Wall Street to Main Street--jittery about the future of the U.S. economy this year.
Last week's announcement that the U.S. unemployment rate rose to 5% in December, the highest in two years, sent stocks tumbling further and some economists talking about recession.
"This could potentially be a turning point," Vincent Reinhart, former top staff adviser to Federal Reserve Chairman Ben Bernake, told Bloomberg.com [link]. "The U.S. economy is flying closer to the ground than we might have thought before."
In nearly 60 years, the unemployment rate has never risen by as much as it did last month without the economy being in recession, according to John Ryding, chief U.S. economist for Bear Stearns Cos.
In addition to the increase in the jobless number, non-government payrolls fell in December for the first time since mid-2003. The losses came primarily in manufacturing, construction and retail businesses. However, payrolls had gained the previous month and other economic indicators have yet to signal a recession.
A survey of 62 economists by Bloomberg News this week found that most believe the economy will experience slower growth this year but avoid a recession. Overall, they forecast 1.5% growth in the first half of the year, which is the same rate the economy achieved in the fourth quarter of 2007. For the most part, they expect consumer spending to continue at the present level and the Federal Reserve to lower interest rates more than had been anticipated until now.
Many economists believe that the Federal Reserve will certainly lower interest rates at its next meeting later this month, perhaps as much as half a point. According to futures trading on the Chicago Board of Trade, the chance of a quarter-point rate drop is 100% and of a half-point reduction is 60%.
There is even some optimism in the housing sector. The chief economist of the National Association of Home Builders (NAHB), David Seiders, said last month that with the help of Congress and the Federal Reserve, the housing industry would begin its recovery in the second half of this year.
"I think that the best bet is that 2008 is the year we will be looking at the bottom for various components of the housing market," Seiders said. He also forecast slow economic growth overall for this year.
He said the NAHB Housing Market Index, which predicts demand for new single-family sales, has stabilized at low levels during the final quarter of 2007 and that this is an indication that, "we are now approaching the bottom of home sales activity and we anticipate a recovery in sales beginning in the second quarter of 2008."
Meanwhile, the Kiplinger newsletter characterized the 2008 U.S. economy as having a "precarious balance," in which every negative has an offsetting positive. Among the economic challenges are the housing market, high energy prices, sluggish growth in business profits, cutbacks in state and local tax receipts, and the danger of inflation.
On the plus side, Kiplinger listed such factors as continued per capita personal income gains, productivity growth, a Federal Reserve acting aggressively to sustain economic growth, a low core inflation rate, advances in energy conservation and technology, and growth in many industries, such as health care, electronics, food and agriculture.
In other words, how the U.S. economy will perform in 2008 remains anybody's guess.