Latest Forecast
National Forecast Analysis 2008
OLD DOMINION UNIVERSITY
ECONOMIC FORECASTING PROJECT
COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION
PRESS RELEASE
January 23, 2008
2008 ANNUAL NATIONAL ECONOMIC FORECAST
(All forecasted changes are relative to calendar year 2007)
Real GDP (+2.0%)
U.S. economic growth is projected to decline from 2.3% in 2007 to 2.0% in 2008; below the 3% average yearly U.S. growth rate of the past 50 years. Our forecast is based on the assumption that the federal government will implement a tax rebate that averages roughly $1,000 per household. Distribution of the rebate is assumed to be distributed from June through August of 2008.
The 2008 national forecast is really a story about economic adjustment. The economy in 2008 will face serious adjustment problems that stem directly from the housing price run-up of 2002 to early 2007. In particular, the precipitous decline in mortgage equity withdrawal to proportional levels near those of before the housing bubble will seriously constrain the growth of household spending in 2008. In addition, uncertainty in financial markets that resulted from the lack of transparency, poor assessment of risk and the resulting sub-prime mortgage defaults, will need to be reduced in order that credit flows can be normalized.
Despite a boost from the tax rebate, 2008 growth will be limited by the effect of a significant reduction in mortgage equity extraction by U.S. households, declining home prices, reduced residential construction, relatively high oil prices, a reduction in the growth rate of state spending and tougher credit constraints imposed by lending institutions. Rising net exports, high levels of corporate retained earnings that help corporations internally finance investment and a rising federal government budget deficit are expected to help cushion growth rate reductions in other components of economy-wide demand, particularly the growth rate of consumer spending.
Consumer Price Index-U (+2.3%)
Assuming oil prices averaging $80 per barrel in 2008, the rate of increase of the CPI should decline slightly from that of 2007. The lagged affect of higher 2007 energy prices on the CPI, especially the steep increase in the fourth quarter of 2007 are likely to continue to work their way through the economy's relative price structure until the end of the third quarter of 2008.
Three-Month Treasury Bill Rate (Year Avg. 2.8%)
The Federal Reserve Board is expected to find itself in a particularly difficult position in 2008. The pressing need to insure economy wide liquidity in the face of lagging growth in consumer spending and problems in the financial markets, created primarily by the cycle of mortgage defaults, credit restrictions and declining residential real estate values, will conflict with the need for price stability. Oil price increases, along with the spread between rising labor costs and labor productivity, significantly reduce the degrees of freedom available to the central bank with respect to an easy monetary policy. However, limited employment growth through the third quarter of 2008 is expected to induce the bank to reduce the federal funds rate to 3.25 percent.
Prime Rate (Year Avg. 6.0%)
As with other short-term rates, the prime rate will follow the course of the federal funds rate.
Ten-Year Treasury Bond Rate (Year Avg. 3.9%)
The long bond rate has experienced a significant decline from the summer of 2007. The decline has been primarily the result of a "flight to safety" as risk premiums for private securities increased due to the considerable increase in uncertainty in the bond market; uncertainty that resulted from sub-prime mortgage defaults and increased expectations of recession in 2008. First half rates are likely to linger around a range of 3.5 to 3.8 percent. In the second half rates are expected to rise as the expected rate of economic growth increases.
30-Year Conventional Mortgage Rate (Year Avg. 5.7%)
Long-term mortgage rates will follow and be affected by many of the same market factors as those influencing the ten-year T-Bond rate.
