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Updated 10:00 AM November 19, 2007




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Economists: Resilient U.S. economy will rebound

Despite a slumping housing market, rising oil prices, flat auto sales, a weak U.S. dollar and waning consumer confidence, America's economy will not slip into recession, U-M economists say.

"There is enough resilience in the economy to keep output expanding," says Saul Hymans, professor emeritus of economics. "The Federal Reserve's recent action to contain the credit crisis stemming from problems in the subprime mortgage market appears to be averting the development of a systemwide credit crunch, and lower interest rates are lending support to economic activity."

In their annual forecast of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe say, however, that national economic output growth (as measured by real Gross Domestic Product) will remain sluggish in the short term due to the ongoing decline in residential construction and subdued growth in consumer spending.

They say the rate of economic growth will be just 2.1 percent this year, down from 2.9 percent in 2006. But output growth will increase to 2.4 percent next year and accelerate to 3.4 percent in 2009.

"By mid-2008, the downturn in homebuilding is reaching its bottom," Hymans says. "Energy prices, while still quite high, are down from their recent heights and edging lower. Consumer spending begins to pick up and nonresidential investment remains relatively strong. With all of these factors contributing, the pace of real GDP growth picks up during the second half of 2008 and proceeds at a healthy clip during 2009."

According to the forecast, both residential construction and existing home sales will begin to turn up in the second half of next year. Housing starts, which are down 35 percent since 2005, will continue to fall from 1.35 million this year to 1.21 million in 2008, before increasing to 1.55 million the year after. Existing home sales will keep sliding from last year's 5.71 million to 4.94 million this year and to 4.14 million in 2008, then head back up to 4.84 million in 2009.

On the energy front, oil prices have jumped more than 50 percent since the end of last year (from $60 per barrel to more than $90), but the economists predict a 15 percent decline over the course of 2008.

"That still leaves the price way above the level that seemed extraordinarily high only a year ago, but going down to $78 oil is a far more positive prospect for the U.S. economy than has resulted from the oil market in recent years," Hymans says.

Hymans and colleagues say, however, that higher fuel prices have taken a bite out of household purchasing power and the housing slump has cut severely into the ability of households to turn home equity into cash. In addition, automakers have curbed attractive financing and rebate incentives.

This all adds up to a relatively weak market for cars and light trucks over the next two years, they say. Sales will continue to slide from last year's 16.5 million units to 16.1 million this year and to 16 million in 2008 — the weakest total in a decade. Sales start to recover with 16.3 million units in 2009.

The forecast also calls for stronger consumer spending, overall, in 2009. Moreover, consumer price inflation for all items will remain in check, edging downward from last year's 3.2 percent to 2.8 percent this year and next, and declining further to 2.5 percent in 2009.

Unemployment will edge up from a current rate of 4.8 percent to 5.1 percent by the end of 2008, before falling back to 4.8 percent by the close of 2009.

Finally, interest rates will hold fairly steady throughout 2008, but are expected to rise in 2009. Mortgage rates will increase from 6.4 percent currently to 6.8 percent by the end of 2009, while T-bill rates will jump about a point over the next two years.

The U-M forecast is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics.

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