Global Insight, one of the top international economic forecasting firms, now sets the probability of a recession in the U.S. at 50%. In response, the Federal Reserve Board (FRB) took action in an emergency session January 22 to interest lower rates by more than was expected, 3/4 of a percent.
The lowering of interest rates will be helpful, but is not enough in and of itself to prevent a recession if oil prices remain as high as they are currently and unemployment continues to rise, says Dr. Marianne Hill, senior economist with the Institutions of Higher Learning.
Hill said lower interest rates will encourage both spending and investment in Mississippi and elsewhere in the country, but the positive impact will be difficult to see. “However, the growth rate of the economy would be even lower without this positive intervention by the Fed,” Hill said. “Mississippi’s growth rate in 2007 exceeded that of the rest of the nation, even though our foreclosure rate is among the highest in the country. Katrina-related spending and new business investment are likely to mean that the state at the least keeps pace with the rest of the country.
“However, our foreclosure rates are high and rising, and subprime borrowers here will continue to be hit hard. Mississippi has had foreclosure rates in the top 10 in several recent reports of the Mortgage Bankers Association and that will likely continue to be the case.”
Mississippi had the fourth highest foreclosure rate in the nation in the second quarter of 2007, at 4.28%. That was just behind Ohio at 5.44%, Michigan at 4.61% and Indiana at 4.6%. In the third quarter of 2007, Mississippi’s rate rose to 4.73%.
Hill doesn’t think the rate decrease will have much impact in the stock market. The stock market has anticipated lower interest rates, and taken this into account in its assessment of the economic outlook. But there have been some signals from the White House that other interventions, perhaps in the form of tax breaks or rebates, are possible.
“Any such interventions would provide some additional stimulus to the economy and speed up the economic pace,” Hill said. “Lower oil prices would also reduce the probability of recession.”
Dave Dennis of Gulfport, who just rotated off the New Orleans branch of the FRB as a three-term chairman, said the FRB is quite cognizant of the current economic conditions and trends not only in Mississippi, but nationally, and from a geopolitical global perspective.
“The FRB will indeed try to project current monetary requirements, and position policy to accommodate the needs of the U.S. economy,” Dennis said. “I had the opportunity and privilege last month to have dinner with FRB Chairman Ben Bernanke, and spend a couple of hours with him the next day. Chairman Bernanke is very intuitive and instinctive about the dynamics of this ever-changing economy. He clearly understands the Mississippi markets and our state’s evolving and changing economy.” Dennis, who is owner of Specialty Contractors & Associates in Gulfport, said the lower implied or target interest rate should certainly have a positive stimulus impact on the Mississippi construction, development and Hurricane Katrina rebuilding efforts.
And while no region in the U.S. is immune to economic downturns or fluctuations, Dennis predicts Mississippi should fare better than other regions due to the need for rebuilding, and federal relief funds still flowing into Mississippi.
Insurance remains the biggest barrier to recovery from Katrina.
“We must solve the insurance issue, as it is the single most important lynch pin to facilitate a recovery in Mississippi,” Dennis said.
Consider the opportunities
Stacey Wall, president and CEO of Pinnacle Trust, Jackson, said there could be some real buying opportunity for stocks ahead.
“Based on the 10 recessions since 1945, the stock market tends to anticipate the slowdown by declining into the first five to six months of a recession before recovering in anticipation of the recession’s end,” Wall said. “In all 10 cases, the recession low marked a bear-market bottom. Following those lows, the market’s performance has been exceptional with the S&P 500 up by a mean of 16% three months later, 24% six months later, and 32% a year later. So, if a recession is underway, brace for more market weakness ahead. But this could eventually produce a table-pounding buy opportunity for stocks.”
Wall said while it is important for the Fed to lower rates to stimulate a sagging economy, there are other implications. Lower interest rates are not good for an already battered U.S. dollar.
“Our purchasing power has been pretty severely eroded here in the U.S.,” Wall said. “Lower rates can also discourage savings, and we’ve got a real problem with U.S. consumer savings rates. I wouldn’t want to be in the Fed’s position right now.”
There is no question that the economy is in trouble, said Dr. William Gunter, a professor of economics and director of the Bureau of Business and Economic Research at the University of Southern Mississippi.
Gunter points to the following evidence the additional rate cut was needed:
1. The December employment report (18,000 new jobs is very weak). Approximately 130,000 new jobs are needed each month on average to keep the unemployment rate from increasing.
2. The Christmas retail sales report, a drop of .4%, unsettled markets, although there is evidence some of December sales shifted to November. Overall, the November-December picture looks a little better than the December picture alone.
3. Housing markets continue to be depressed with private residential construction spending almost 18% below year ago. Housing prices are falling, depressing consumers’ sense of well-being.
4. Consumer confidence is as low as it has been since the 1990s, and producer confidence is falling.
5. Energy prices remain at historic highs.
6. There is growing concern about state and local area public sector budgets as sales tax revenue growth as well as property tax revenues slow or actually decline.
There is some good news on the export side of the equation. The weak dollar, which raises the cost of imports, makes exports cheaper.
“However, there is growing doubt that exports can offset the declines in consumption and investment,” Gunter said. “The real question is, “Does all this bad news lead to a recession?’ It seems the consensus among economists is that the probability of recession is now above 50%, and I would certainly agree with that. Stimulus packages being discussed will probably not alter that outcome because they will likely be too late in arriving. Similarly, interest rate cuts may help to turn the economy around quickly, but there is a lag in the effects.”
He said it is likely that the dye is cast for the first quarter of 2008, and that is likely negative GDP growth. There is little that fiscal or monetary policy can due to stop that outcome. But Gunter said the forecast for the second quarter and beyond could very well be impacted by an aggressive interest rate policy together with some sort of stimulus package.
The Mississippi economy is not likely to experience the same level of decline from the housing crisis since there was far less of a bubble to begin with. However, Gunter said declines in confidence and home equity will/are impacting consumer spending and that in turn could impact sales taxes.
“Sales taxes are already slowing,” he said. “I would expect to some softening in retail sales employment, construction sector employment and to the government sector. Manufacturing has not been a strong employment sector and is certainly not likely to show any rebound in this environment. Some resolution of the insurance crisis along the Coast could go a long way to stimulating the construction sector at this time.”
Scott Reed, CEO of Hardy Reed Capital Advisors, Tupelo, said there is evidence that some sectors of the economy are already in a recession.
“Will we go into a full recession?” he asks. “I have no clue. I do remember in the mid-1990s we went into recession and actually came out of it before the government officially announced the recession because recession numbers are based on two quarters’ downturn. By the time they announced it, we were out of it. This is the feel I have about this one. If we go into a recession, I would bet that it will be a mild one.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.
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