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Monthly Economic Outlook

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September 2008

Wed, Sep 10 2008, 10:08 GMT
by Wachovia Research Team

Wachovia

U.S. Overview

The next few quarters will be the most trying time for the U.S. economy in the past two decades. Our forecast has real GDP rising at a 1.9 percent pace over the next year and real final sales to domestic purchasers rising at just a 0.6 percent pace. Conditions will feel even weaker than this. Overall consumer spending is expected to decline in both the third and fourth quarters, while spending on goods should drop in three of the next four quarters.

Consumer spending is being affected by rising unemployment, slower income growth and falling home prices. The unemployment rate is now expected top out at 7.5 percent, which will further cut into income growth. Falling home prices are the source of much of this angst and housing has not bottomed out just yet, although we are beginning to see some tentative signs of stabilization.

Exports have provided an enormous boost for the economy over the past year but are now expected to slow. Global economic growth is moderating and many developed nations are likely to see declines during the coming year.

With global growth slowing, commodity prices have tumbled, which, along with stronger productivity growth, is helping curb inflationary fears. Lower inflation should keep the Fed on hold for the foreseeable future and opens the door for an ease if conditions warrant.

International Overview

The dollar has appreciated significantly and broadly since mid-July. Does the dollar’s newfound strength reflect a better assessment of the U.S. economy? Not really. The greenback has strengthened versus many foreign currencies because the outlook for foreign economic growth has deteriorated faster than many investors had anticipated earlier this year. Signs of slowing growth in Australia led the Reserve Bank of Australia to cut rates earlier this month for the first time since December 2001. The European Central Bank and the Bank of England have not cut rates over the past few months due to concerns about inflation. Indeed, the ECB hiked rates in July. However, growth rates in the Euro-zone and the United Kingdom have slowed sharply (Great Britain will probably experience its first recession since the early 1990s), which should cause inflation to recede in the months ahead. In our view, it is only a matter of time before both central banks cut rates.

The greenback has risen very sharply in a relatively short period of time, so some retracement is bound to happen. That said, we project the dollar will trend higher versus most currencies in the quarters ahead. Although we do not expect the Fed to cut rates further, we look for foreign central banks, most notably the ECB and the Bank of England to ease policy going forward.

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Published on  Wed, Sep 10 2008, 10:12 GMT