Forecast: Mild Recession, with Improvement in 2009
NAHB’s baseline forecast now shows a mild economic recession in the early part of this year. The forecast calls for real gross domestic product (GDP) to contract modestly in the first half of 2008 year and for the labor market to deteriorate for a somewhat longer period―a normal timing relationship. The recession forecast was prompted by a flurry of recent negative economic news―including soaring energy prices, a deteriorating trade balance, plummeting consumer sentiment, ongoing erosion of the labor market, and more negative readings on the housing market.

The Federal Reserve is fighting desperate battles and expending a lot of ammunition on two fronts. On one front, the Fed is aggressively easing monetary policy to support economic growth, and that obviously is not going very well. In fact, the Fed’s job now is to limit the depth and duration of an economic recession that apparently is already under way. We expect the next Fed salvo to be at least quarter-point cuts in both the federal funds and discount rates at the upcoming meeting of the FOMC on April 30. On the second front, the Fed has introduced a series of innovations designed to improve financial market liquidity and functioning, apparently with only limited success to date.

Recent actions include lowering the cost and increasing the allowable term of discount-window credit to commercial banks; increasing the size of the Term Auction Facility, through which credit is auctioned to depository institutions; initiating a Term Securities Lending Facility, which allows primary securities dealers to swap illiquid mortgage-backed securities for highly liquid Treasury securities; and creating the Primary Dealer Credit Facility. In its spare time, the Fed recently took unprecedented steps to forestall the bankruptcy of the large nonbank primary securities dealer, Bear Stearns. This action may very well have prevented a full-blown financial panic. On the fiscal front, the stimulus package signed into law earlier this year should provide decent support to the economy starting late in the second quarter and extending into the fourth quarter. Indeed, NAHB's assumptions on the effectiveness of the stimulus package, as well as the Fed's monetary policy, are key to the “mild” nature of the recession that’s now part of the baseline forecast.
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