Visions - Winter 2008 - 12

Eye On Washington The U.S. Macroeconomic Outlook Is Mixed During This Election Year by James Winslow, Director Of Government Affairs, SCOA Washington D.C. Office T he Washington office continues to receive conflicting signals on where the economy is headed in 2008. While analysts on Wall Street tell us that slow growth and elevated inflation are harbingers of a looming recession, Stratfor (Strategic Forecasting Inc.) confidently predicts that the subprime lending crisis is overblown, and that the “combination of weaker energy prices (which free up resources) with a lower dollar (which boosts exports) has primed the U.S. economy for a strong performance in 2008.” Although the Bank Credit Analyst as recently as a few weeks ago said that the next U.S. recession would arrive no sooner than 2010-2011, they recently changed their tune and told us that “the U.S. economy will fall into recession this year.” While the crux of the reasoning behind BCA’s change of heart appears to lie in the housing slump/subprime mortgage dilemma and credit crunch that has had repercussions through the financial markets, other economists have assured us that the data on economic fundamentals was much worse a year ago than it is today. In fact, both the International Monetary Fund and the Institute of International Finance predict that U.S. GDP will grow 2.3% in 2008. The Definition of Recession. The Policy Response from Washington A recession is defined as “a general decline in economic activity for a period, shorter than a depression, during which there is a decline in trade and prosperity.” While the National Bureau of Economic Research (NBER) is the committee tasked with declaring when a recession has occurred, it is a misnomer that the NBER declares a recession strictly on the basis of whether economic growth has been negative for two consecutive quarters. The NBER uses a number of economic indicators to determine the health of the economy, and their pronouncements historically come long after recessions have begun, seven months on average. While some anecdotal evidence might point to a recession, if the question is: are we in a recession now; the answer would seem to be: No. GDP for 2007 was 0.6% in the first quarter, 3.8% in the second quarter, and 4.9% in the third quarter. While the advance forecasts of GDP growth for 2007’s fourth quarter are due out at the end of January, the reports the Washington office has seen place the consensus estimate between 1.2 and 1.5%. 12 visions Winter 2008 Although the question of whether the U.S. is already in recession or will go into recession in 2008 remains open, the policy responses from Washington, in this election year, have been clear—economic stimulus is needed to ward off a coming recession. First, the Federal Reserve acted with the biggest one-day reduction of interest rates on record, cutting the federal funds rate to 3.0%, with additional rate cuts likely follow. Second, in a rare show of election year bipartisanship that may, or may not, indicate how dire the economic circumstances actually are, the White House and Democratic House leaders agreed on a $150 billion economic stimulus package of tax breaks and investment incentives. Conclusion Even as we continue to hear that certain economic models based on monetary and tax policy suggest that real GDP could grow as fast as 3.0-3.5% in 2008 and that the probability of recession in 2008 is as low as 10%, the mood in Washington on all things concerning the economy has turned decidedly bleak.While consumer spending remains the key to continued U.S. economic growth, the number of unemployed Americans rose 13.2% from December 2006December 2007; since 1950 a 13% annual rise has been a sign of recession every time. The Washington office will continue to track and report on the state of the economy, and is open to discussing any of the issues raised in this report. For more information, contact James Winslow, Director, Government Affairs, (202) 973-0474, james.winslow@sumitomocorp.com. Sumitomo Corporation of America

Visions - Winter 2008

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