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The Conference Board Sees U.S. Economy Contracting Into 2009
Oct 10, 2008
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Negative growth rates for the U.S. economy this past quarter will continue through the fourth quarter, and result in further contraction into the first half of 2009, according to The
Conference Board's latest economic forecast. "As all eyes turn this weekend to Washington, D.C., for the IMF-World Bank meeting, one hopes that the leaders who gather there are able to engage in productive consultation about what next steps governments and central banks can take to stem the crisis beyond the latest coordinated cut in global interest rates," says Dr. Bart van Ark, vice president and chief economist of The Conference Board.

"If government and business leaders can calmly -- and privately -- focus squarely on a way out of all this, looking to prevent tomorrow's fires even as they fight today's, we can still avoid worse," he continues. "This means finding a crucial balance between the short-run steps needed to
get the economy back on its feet and the long-run needed to foster a new phase of global growth."

The Conference Board says that the markets are not reacting as hoped to the various government rescue plans enacted in the past weeks, and that feared global contagion has begun to materialize in
some markets. The new forecast from The Conference Board is predicated on some loosening of credit markets in response to the measures taken by theU.S. government.

"We see no sign of improvement in the housing market before the first half of 2009 at the earliest, and housing prices may drop further -- at significant cost to consumer spending over the next two quarters, holiday season or none," says Dr. van Ark. "Meanwhile, several short-term credit channels such as commercial paper are also freezing up, which can seriously impact day-to-day business operations."

The Conference Board's current forecast assumes that inter-bank lending will recover, and that investor and business confidence will gradually return as government measures take hold in a matter of weeks -- which is no small assumption.

The rest of the world -- particularly Europe -- is being buffeted by the current storm, too, and even Asian economies are now seeing some slowdown in growth, consumer expenditure, and exports. That will affect U.S. exports, which have been a major engine of U.S. growth over the past half-year. Meanwhile, U.S. imports are also slow, which -- despite the gradual strengthening of the U.S. dollar -- impacts companies' ability to utilize cheap sources.

"A sustainable long-term growth environment will require a new financial architecture that balances the necessary spreading of financial risk with sufficient regulatory oversight," concludes Dr. van Ark. "Such an environment cannot rely solely on the financial conservatism of deposit-based lending. A huge amount of capital investment will be needed to drive the innovation and technological change that are our best hopes of achieving a competitive and sustainable future for the global economy."

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