A significant concern in the market and economy continues to be the potential negative impact of the continued softness of the U.S. housing market along with subprime and credit concerns on the U.S. economy. As I discussed recently, the July housing market numbers continued to reflect the turmoil that prevails.
Evidence of the potential of a recession was the quarterly Anderson Forecast performed by the University of California at Los Angeles released on Wednesday. The research estimates that GDP growth will come in at marginally over one percent for the fourth quarter of 2007 and the first quarter of 2008. The report also suggests that GDP will be soft throughout 2008 and then move back up to an estimated three percent in 2009.
By definition, a recession implies two or more consecutive quarters of a decline in the GDP, which is the case given the Anderson Forecast. Yet, a recession is also defined as “a significant decline in economic activity spread across the economy, lasting more than a few months,” according to the National Bureau of Economic Research. In the case of the U.S., by this definition and based on the Anderson Forecast, the U.S. is at risk of moving into a recession by 2008.
Should a recession materialize, the impact could be rampant throughout the economy. Consumers would spend less and this would materially negatively impact economic growth since consumer spending in the U.S. accounts for two-thirds of GDP growth. Sectors feeling the pinch would include retailers, the travel industry, and other non-essential spending.
On the corporate front, as consumers spend less, there would be a lag in revenue growth and earnings could be curtailed. As stocks fall, less wealth would be created and this means less spending by consumers; thereby, impacting economic growth.
My advice would be to remain cautious and monitor the economic growth for a hint into forward earnings. The third and fourth quarter should provide a hint.