Economic forecast dim in 2008

Recession is the underlying theme of Missouri State University’s Bureau of Economic Research 2008 Economic Forecast, released last month. Among the predictions for the national economy in 2008: real gross domestic product growth of only 1.9 percent, an unemployment rate of 5.1 percent and inflation of 3.5 percent – and, perhaps most telling, a 48 percent chance of a recession in 2008, up from 29 percent in 2007.

The local predictions aren’t much better, including an increase to 5.5 percent unemployment in southwest Missouri.

The housing issue

David Mitchell, director of MSU’s Bureau of Economic Research and an economics professor, said that while numbers in several economic sectors such as the housing market are troubling, much of the threat of recession – defined as two consecutive quarters of negative growth – comes from decreasing consumer confidence.

“When reports say 1 percent of the homes are in foreclosure, that’s more than the long-term average, but it’s still not a whole lot of people being affected. There are about 120 million households in this country, and many of those rent,” Mitchell said. “It’s really the psychology behind it that is causing the decreases in consumer spending. But the higher gas prices and food prices are compounding the problem – people are saying, ‘Wow, things are bad.’”

The housing market is slowing, even in southwest Missouri, where Mitchell’s report calls median home prices reasonable compared to the rest of the country.

Doug Andrews, a Realtor with Century Realty in Marshfield and 2008 president of the Greater Springfield Board of Realtors, said that home prices have continued to hold steady in recent quarters, but home sales are dropping.

“We have a little slowdown in sales, and a lot of that is people turning on the TV news and seeing the numbers, the information about the number of foreclosures still rising nationally,” he said. “All of those things make people a little hesitant to move.”

The local home sale numbers bear the proof: Single-family home sales in fourth-quarter 2007 were down 12.4 percent from the same period in 2006, with median sale prices up only 0.4 percent.

The lack of consumer confidence, Andrews added, has created fear among home builders, compounding the problem. According to Greene County’s Building Regulations Department, housing starts dropped 46 percent in 2007.

“Since housing sales have slowed a little bit, we have a lot of spec builders who really aren’t willing to start digging ground and putting a new house in,” Andrews said.

Compounded problems

Compounding the housing market struggles are interest rates, fuel prices and employment rates, experts say.

Mitchell said the Federal Reserve policy of keeping interest rates so low has inflated the ratio of median home prices to median household income, a key indicator of home affordability.

Fuel prices also are increasing – a trend Mitchell said will continue over the long term.

One problem every market faces, including Springfield, is employment.

Bill Dowling, the city’s director of work force development, pointed to recent layoffs by Regal-Beloit and TeleTech in Springfield of more than 260 workers combined, as well as the closure of York Casket in Marshfield and O’Sullivan Furniture in Lamar.

“The only real growth we’ve seen is in the service sector, but now with consumer confidence dipping, we don’t know how that will be affected,” Dowling said. “When confidence dips, people don’t buy as much, affecting retail, and they don’t travel as much, so Branson tourism could be affected as well.”

Nationally, the downward trend has already started: The U.S. Department of Labor’s January unemployment report showed a decrease of 17,000 jobs, representing the first payroll decrease since August 2003, when the economy was still recovering from the 2001 recession.

Adding to the employment woes, economist Mitchell said, is the statewide minimum wage increase passed in 2006. The Missouri minimum wage grew 15 cents in January to $6.65 an hour, which Mitchell said further dampens the spirits of employers.

“It’s not just the minimum wage that goes up – there’s also payroll tax and unemployment tax that the employer has to pay as well, and that makes them even less likely to hire,” Mitchell said. “And when there are fewer jobs, or people aren’t getting as many hours as they were before, people get nervous.”

Stemming the tide

With all the doom and gloom of the report, Mitchell did have some encouragement to offer.

First, he notes in the report that the Springfield and southwest Missouri economies are stronger than the state as a whole – unemployment rates are expected to be lower and job numbers, while not stellar, shouldn’t drop as much as the state and national counterparts.

Dowling echoed those sentiments, though his optimism was tempered.

“With the downsizing of the manufacturing jobs, we can’t really expect those types of jobs to return,” Dowling said. “We have to look to new things like the Jordan Valley Innovation Center and those new economies to see how we can be included in those.”

Overall, Mitchell said the fundamentals of the economy remain strong – as long as consumers don’t panic.

“If consumers readjust to the higher prices of food and energy, and they realize it doesn’t make sense to move right now or sell their house, and as long as they don’t sell their house it doesn’t matter if the value is decreasing,” he said, “then they’ll go out and start spending, and we could avoid recession.”

Mitchell doubts, however, that President Bush’s proposed taxpayer rebates will have much impact.

“I think what you’ll see is a small, relatively short increase in consumer spending for a quarter, and then it will drop back down to the trend,” he said.

Mitchell added that a brief, mild recession might not be a bad thing for the economy in the long run.

“A recession could help us throw off some of the yucky stuff we’ve accumulated over the past several years,” he said, “and give us a chance for a fresh start.”

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