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US Regional Watch

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4th Quarter 2008

Mon, Jan 19 2009, 10:37 GMT
by BBVA Bancomer Team

BBVA Bancomer

In this issue you'll find:

• U.S. Economic Outlook
  
• Regional Outlook
  
• Oil Forecast
  
• Oil Impact on Texas
  
• Hurricane Ike
• MSA Analysis
  
• Commercial Real Estate
  
• State Rankings
  
• Health Care Challenges
  
• States in Figures
  
• Forecasts

U.S. Economic Outlook

Over the past three months, the current fi nancial crisis has outgrown the US and other developed countries and gone global. Since the bankruptcy of Lehman Brothers in September 2008, the distortions in global fi nancial markets have become dire, as risk aversion reached extreme levels, liquidity tensions increased signifi cantly, and economic growth strongly declined. In the short term, despite recent improvements in liquidity, there is little protection from the economic malaise around the world. The G3 (U.S., Japan & Europe) will contract in 2009 at rates of close to -1%.

In the US, the economic recession offi cially began in December 2007. In the fi rst part of 2008, the economic pain was not refl ected in aggregate production numbers, as external demand compensated for strong deterioration in residential investment, consumption and non-residential investment. In the last part of the year, however, the economic downturn entered a new and dangerous path.

On the one hand, the economic situation worsened. Housing prices have yet to fi nd a bottom, external demand began to falter as growth slowed (and in some cases ground to a halt) around the world, and consumers in the US stopped spending. The prospects of lower demand and the expectation of a deep economic downturn have, in turn, created sharp employment declines. Consumers have curtailed spending, in a context where families have lost much of their wealth, many face credit constraints, and others are structurally changing their spending patterns to save more.

On the other hand, fi nancial institutions have constrained credit as a negative feedback loop is feeding from economic growth to fi nancial institutions balance sheets. It’s in this environment that federal authorities are reacting fast with measures that range from assistance to homeowners, to fi scal stimulus and injecting public capital in the banking system. The central bank has reduced interest rates to record lows, and it is fast expanding its balance sheet.

Counting on fi scal stimulus, we expect the US economy to grow 1.4% in 2008 and -0.8% in 2009, although there is a signifi cant degree of uncertainty depending on the fi scal stimulus package that is fi nally approved. At present, the steps taken by the government have avoided worst-case scenarios, but are not enough to guarantee a recovery in 2009. We would expect a recovery to take place in late 2009 and 2010 if additional fi scal measures are taken. The current situation calls for new fi scal stimulus in the US and elsewhere, and pursuing further monetary policy actions, using non-standard measures to increase the size and scope of the quantitative easing.

Inflation will hardly stand in the way. The CPI will turn negative next year, as lower commodity prices and the economic slack will push prices down. Core infl ation will settle below 1% on average in 2009. While this could raise the specter of defl ation, we believe the risk is still small, especially as the Fed travels the road of quantitative easing. While this road has its own perils, it is the best option, especially if it fi nances a fi scal stimulus.

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Published on  Mon, Jan 19 2009, 10:40 GMT