Confluence of structural and cyclical change clouds outlook for 2008 and beyond.

The probability of a recession has been rising with each downturn in the stock market, bad news about housing, or the lackluster performance of the labor market. While there is no unambiguous indicator for a recession, there are some precursors. Relevant signals from 2007 include an inverted interest rate yield curve, a double-digit sell-off in the S&P 500, as well as a significant rise in the unemployment rate. However, the slowdown is not expected to reach the technical definition of a recession, which is two consecutive quarters of negative growth. Many sectors like auto parts, telecoms, financial services, and media may already be in recession mode, while other sectors like chemicals, utilities, food/beverages, and healthcare are experiencing better than expected growth. For the economy as a whole, a "growth" recession where real GDP growth is 1.5 percent or less can be expected during the first half of 2008. With the fallout from the subprime debacle still lingering, second half economic growth will remain subpar, improving to only slightly above the 2.0 percent range. For 2008, growth in real GDP is expected to reach only 1.7 percent, the lowest rate since 2002. Unemployment will inch upward for most of 2008, ending the year at 5.2 percent. Consumer prices are anticipated to creep upward to a 2.7 percent rate. Working in our favor is the fact that the volatility in real GDP growth had declined markedly over the past two decades. Since 1987, there have been only five quarters of negative growth, averaging 1.5 percent, and thirteen quarters (16.3 percent of the time) with growth averaging 0.8 percent. In summary, the magnitude of the economic slump will not be as bad as some are predicting. But, the duration of the slowdown can be expected to linger much longer than anyone anticipates.

(1) Ben S. Bernanke, Cara S. Lown, and Benjamin M. Friedman. "The Credit Crunch" Brookings Papers on Economic Activity, Vol. 1991, No. 2. (1991), p. 206.

(2) Ibid., p. 237.

(3) Ibid., p. 237.

(4) David S. Johnson, Jonathan A. Parker, and Nicholas S. Soules. "Household Expenditure and the Income Tax Rebates of 2001." National Bureau of Economic Research, Working Paper 10784. http://www.nber.org/papers/w10784.

(5) Paul J. Lim. "When Will Earnings Recover?" New York Times. 17 Feb 2008. http://www.nytimes.com/2008/02/17/business/17fund.html.

(6) Martin Crutsinger. "Fed's Bernanke Sees Sluggish Growth; More Rate Cuts Likely." The Commercial Appeal. 15 Feb 2008. C4.

John E. Gnuschke, Ph.D.

Dr. John E. Gnuschke is Director of the Bureau of Business and Economic Research and the Center for Manpower Studies and Professor of Economics at the University of Memphis. The Bureau and the Center are the applied business, economic, and labor market research divisions of the Fogelman College of Business and Economics. The divisions support the research and publication efforts of faculty members and interact with other research organizations, government agencies, and the business community. The Bureau and the Center rank among the top applied research divisions in the nation with approximately $3.0 million in research contracts. Dr. Gnuschke also serves as the Director of the Applied Information Technology Center and is Co-Director of the Center for Real Estate Research.

Dr. Gnuschke received his Ph.D. and M.A. degrees from the University of Missouri at Columbia and his B.S. from Utah State University. His areas of expertise include market assessments, survey research, impact studies, revenue and cost estimates, labor market studies, and competitor analyses. As a widely recognized leader in his profession, he serves on numerous local, state, and national committees and boards. He has served as president of AUBER (the national Association for University Business and Economic Research). He works closely with community leaders and organizations throughout the Mid-South. In addition to his academic and contract research activities, Dr. Gnuschke has over 25 years of experience as a private consultant to major business, legal, financial, and government organizations.

B. Lewis Alvarado, M.S.

B. Lewis Alvarado is a Research Associate and has been with the Bureau since 1980. Mr. Alvarado earned both his M.S. in Economics and B.S. in Economics from Murray State University. He specializes in quantitative business analysis, economic journalism, demographics, and economic forecasting. Table 1. Consensus Forecasts, 2008 and 2009

2008 2009 Real GDP (%) 1.7 2.6 Consumer Price Index (%) 3.0 2.2 Disposable Personal Income (%) 2.3 2.7 Personal Consumption Expenditures (%) 1.7 2.3 Unemployment Rate (%) 5.2 5.3 Housing Starts (Million) 1.02 1.28 Source: Blue Chip Economic Indicators, February 10, 2008. Table 2. Depth and Duration of Recovery for Last Two Recessions

July 1990- March 2001-

Mar-91 Nov-01 Unemployment Rate (%) 1.3 1.2

Increase 1.3 1.2

Peak 7.8 6.3

(June 1992) (June 2003)

Return * 5.5 4.4

(Dec. 1994) (Oct. 2006) Nonfarm Employment

Decline (%) -1.13 -1.21

Trough (Millions) 108.2 129.8

Return (Millions) * 109.7 132.5 Industrial Production

Decline (%) -3.7 -3.8

Trough 66.5 97.8

(Mar. 1991) (Dec. 2001)

Return * 69.3 101.4

(April 1992) (Feb. 2003) Average Monthly Single-Family New Home Sales (000 Units)

Prior Eight Months 590.0 917.8

Recession 479.5 883.3

Post-Eight Months 520.5 944.6 * Return to start date of recession period. Source: SBBER.