Thursday, December 28, 2006
Washington Bureau Chief
WASHINGTON - The key U.S. manufacturing sector is expected to be hit hard next year, heightening fears a recession is now much more likely than many economists had expected.
In its annual forecast, the U.S. National Association of Manufacturers said yesterday it expects factory output to slow to a mere 2.8% increase in 2007, compared with a more-robust 4.5% growth in 2006.
"The economy enters 2007 in a weakened state and a number of shocks could trigger a recession or near-recession economy," said Ethan Harris, U.S. chief economist for Lehman Bros., who pegs the possibility of a recession at 20% or higher.
David Berson, chief economist of U.S. government-backed mortgage-financing firm Fannie Mae, said he is doubtful the U.S. economy will slip into a recession in 2007, "but the risks have risen."
"Some of the Christmas spending wasn't as strong as we'd hope," Mr. Berson said. "I think we have not reached the bottom in housing yet."
David Heuther, the association's chief economist, said he believes manufacturing expansion had likely hit "a cyclical peak in the pace of growth" last year, but that the weaker U.S. dollar was helping boost U.S. exports. That, in turn, could soften the blow.
"After slowing to a 'below-potential pace' in recent quarters, the economy will continue decelerating toward a soft landing in the coming year," Mr. Heuther said, adding he expects the U.S. Federal Reserve to cut its key overnight lending rate by 50 basis points over the next 12 months to 4.75% from 5.25%.
Mr. Heuther's views are similar to those of other economists in the manufacturing sector -- it represents about 20% of total U.S. economic activity -- who feel the slowing housing market and soft automobiles sales will contribute to a sluggish start to the New Year.
Paul Kasriel, chief economist with the Northern Trust in Chicago, said yesterday he sees the chance of a recession as high as 45% unless the U.S. Federal Reserve moves quickly to cut short term interest rates.
"The goods-producing sectors -- manufacturing, construction -- still represent 45% of [gross domestic product]," Mr. Kasriel said.
"These are the part of the economy that move before the economy as a whole goes into recession and right now they're moving south."
One key gauge will come early next week when the U.S. Institute for Supply Management releases its December report on the manufacturing sector. The ISM's manufacturing index for November showed the sector had its first month of contraction since April, 2003.
Most economists expect the impact of slowing housing and energy prices to cut economic growth during the current quarter to 1.9%. But they are also calling for some rebound, with an overall growth rate of 2.3% in 2007. That should pick up to 3% by 2008.
That view is tempered somewhat by the soft retail sales during this key Christmas holiday spending season and the lingering slump in U.S. housing sales.
However, the latest numbers in the housing market show a surprising rebound in new homes sales in November as U.S. homebuilders unloaded stalled inventories.
The 3.4% increase in home sales was nearly double what economists had predicted. Meanwhile, the supply of unsold homes fell to the lowest level since May.
"We might not be at the bottom [of the housing slump], but we're getting very close to it,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte,N.C.
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