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Recession not likely in '08

Thursday, January 3, 2008

Plunging housing market is the source of recession fears

SIKESTON -- While a recession is possible in the new year, local financial experts say it's not likely.

"It's an unsettling period right now," said Dr. Bruce Domazlicky, director of Center for Economic and Business Research at Southeast Missouri State University.

What's generating a lot of buzz of a possible recession is the nation's plunging housing market.

"What's happened at the high point -- maybe 18 months ago -- they were producing 2.1 million a year, and now they're to 1.3 million a year, and that's 800,000 fewer homes being produced. When you look at all that's involved in producing those homes, it will cause some problems," Domazlicky said.

The main problem seems to be a significant excess of housing units on the market, according to the winter edition of Southeast Missouri Business Indicators. And there's no indication yet of a recovery in the housing market in 2008, said the quarterly publication compiled by Southeast's Center for Economic and Business Research.

Domazlicky said a recession technically is defined as a decline in gross domestic product for six consecutive months, or two quarters. Gross domestic product is a measure of output, he said.

"If output and income fall for two consecutive quarters, typically unemployment will rise. Obviously when that happens, incomes fall, and that leads to less spending in the economy," Domazlicky said.

During a recession, the value of homes and durable goods produced by manufacturers decline, and people quit spending as much money, said Mike Bohannon, financial adviser for Raymond James Financial Service in Sikeston.

"There have been a lot of indications in these last couple months of things starting to slow down, and that will continue in the first quarter of this year," Domazlicky said.

Domazlicky said he doesn't think the numbers are bad enough to have a technical recession.

"I think there's enough momentum that will carry over to the first part of 2008 and that's not enough to tip us to an actual decline in output," Domazlicky said.

A second factor contributing to the fear of a recession is the credit crunch, Domazlicky said.

"Some of the financial institutions have had mortgages on books that are somewhat risky," Domazlicky said. "Let's say they lent to people buying homes who didn't really qualify and are now having trouble paying back their loans. As of a result of this, banks have tightened their lending standards."

If that happens, then businesses and individuals find it hard to borrow money, and if they can't borrow money, they can't spend it, Domazlicky explained.

Higher energy prices are a third factor affecting the economy, Domazlicky said.

"If you have to pay $30 to fill up your car, that leaves less money (to spend elsewhere)," Domazlicky said.

Adding to the mix is inflation, which is expected to increase in 2008, the publication said.

"Inflation is where you have ever-increasing prices like gas and oil and commodity products," Bohannon said.

Whether or not there will be a recession in 2008 is up to the Federal Reserve System, Bohannon said.

"The Fed has been cutting rates (in 2007) and that eases the housing woes, and hopefully that will stimulate home buying," Bohannon said.

Domazlicky noted the most recent major economic slowdown occurred in late 2000 to 2001.

"I don't know if that met the recession criteria, but it was a a serious enough slowdown," Domazlicky said, adding the last official recession occurred in 1991 and 1992.

Meanwhile, Domazlicky predicted the economy will have a slow growth for the next six to eight months.

"The economy normally grows about 3 percent. Even if we don't go in a recession and grow 1 percent, that alone is felt (by individuals)," Domazlicky said. "Fewer jobs are created, and there's less spending, and that's just a slowdown. You don't need an out-and-out recession to feel it."

With a full-fledge recession, the impact is more severe and felt wider by more people, Domazlicky said.

Many Americans are already feeling the effects of a slowed economy so just the mention of a possible recession often ignites a different kind of awareness.

"When people hear about a recession or see their neighbors are becoming unemployed, they do cut back on their own spending and try to save more," Domazlicky said. "They might be conservative on their spending and not buy the big-ticket items. It's not good for the economy, but it's good for the individual."