by Dana Wilbourn
posted March 27, 2008
) Photo by Dana Wilbourn Dennis Lockhart |
In recent months, the Fed has repeatedly lowered the inter-bank funds rate which was 5.25% last September and is now 2.25%.
“Changes in the Federal funds rate can influence but not dictate other interest rates in credit markets. There is not a one-to-one correspondence between changes in the Fed funds rate and longer term interest rates for borrowers,” he said.
Mr. Lockhart said that many are asking if our economy is in a recession. “We don’t yet have enough hard evidence to answer that according to the technical definition of a recession which is actually declared by the National Bureau of Economic Research,” he said.
Mr. Lockhart said that a declaration of a recession usually occurs many months after a recession because it is a look back at many different indicators.
“We’ve not yet had two consecutive quarters (or even one quarter) of negative gross domestic product growth which is the popular definition of recession. The fourth-quarter 2007 GNP grew at a rate of 0.6%,” he said.
“Clearly the economy is in a slowdown and that slowdown resembles past periods that were on the leading edge of recession,” he said. “I expect the GNP for the first quarter of this year to show little, if any, growth.”
Rattling off statistics, Mr. Lockhart said that personal income growth has been flat; there has been significant softening of employment, manufacturing, and sales. “However,” he said, “It may still be possible that the economy might not slip past the threshold of a recession. Corporate America is strong and resilient. Balance sheets have been strengthened. Cost structures have been reworked. Our overall corporate sector is in a good position to deal with a weakened economy.”
“In considering the current economic situation, I believe that an important policy objective at this juncture is to ensure that this slowdown is short and shallow.” Mr. Lockhart said, “A critical factor in the determination of the length and depth of the current slowdown is the performance of the housing sector.”
Mr. Lockhart said that, nationally, housing prices have declined by 10.7% from January of last year. He said that local results could differ and that Chattanooga home prices were still rising last year, but at a slower rate. New home starts and sales have declined as well and the sub-prime mortgage industry’s problems have not helped, he said.
Mr. Lockhart said the U.S. economy faces challenges on three fronts: weakening growth, unstable financial markets, and elevated inflation and heightened uncertainty about the inflation outlook.
Turning to the future, Mr. Lockhart said that his forecast is affected by both an economic slowdown that was sharper than he expected and recurring spells of financial market turmoil. Just a few months ago, he said, his forecast showed slow growth in the first half of 2008 and then picking up in the last half of the year.
“Now, the contraction in housing and the dampening effects of financial turmoil on housing and spending could persist for the remainder of the year. The recovery and growth I predicted for the second half of this year may be delayed,” he said.
“The tax rebates should provide some stimulus in the second- and early third-quarters this year,” he said. “But, I do not expect full flow-through of the rebates into personal consumption expenditures. I expect it will take months for housing prices and financial markets to restore the necessary preconditions of stability.”
“My outlook for 2009 is more optimistic,” he said. “By the fourth quarter of 2008, the conditions should be in place to support a return to healthy growth next year.” He said he expects a leveling of prices for energy and other commodities.
Mr. Lockhart said that these are his comments and thoughts and that they should not be attributed to his colleagues or his employer.
Dana Wilbourn
dbwilbourn@yahoo.com
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