SIFMA: U.S. Recession To Continue Through Mid-2009

Securities industry trade group SIFMA — we’d spell out their formal name, but its ridiculously long — said late Monday that it now expects gross domestic product to fall a full percentage point in 2009, as a sharp U.S. recession runs its course through the middle of next year. The group’s economic advisory round table suggested that rampant speculation, but a current lack of certainty, over what the incoming Obama administration will or will not do is “making attempts to forecast more challenging than at any time in recent memory.” Or at least, the past eight years. SIFMA’s group of economists predicted that the nation’s jobless rate will reach up to 7.8 percent by the middle of next year; given other recent predictions we’ve seen here at HW, that should be seen as a conservative estimate. That said, the group’s economists have already been proven too conservative in forecasting Federal Reserve activity; the group said in its report, released ahead of the Fed’s most recent rate decision on Tuesday, that it expected a rate cut of 50 basis points and rates to hold at 0.5 percent through next year. The Fed instead cut rates 75 basis points and said it will hold the line on the federal funds target rate at zero to 0.25 percent. Housing, and all of its reach SIFMA said its panelists of economic experts “identified dysfunctional credit markets and rising employment losses as dominant downside risks to economic growth, with housing and the global economic slowdown also cited.” Forgive us for intruding on a journalistic inquiry here, but come again? The choices for downside risks were a) dysfunctional credit markets, b) rising employment losses, c) housing and d) global economic slowdown? How is anyone to meaningfully separate the four? Is it possible to have a global economic slowdown without employment losses? Could housing fall to literal pieces while leaving global credit markets intact? Could rising unemployment not affect housing? We’ll wait for someone to give us an answer here. In the meantime, back to reporting on what the SIFMA survey did find that made some sense: nobody’s really sure what to expect from the nation’s battered housing markets in 2009. SIFMA found that while the median expectation among its economists was for housing sales and starts to bottom in Q2 2009, the range went from Q4 2008 to Q1 2010. (We want to know the Luddite was that actually suggested fourth quarter of this year, by the way.) “Equally wide was the range of expectations for housing prices to bottom out, from first quarter 2009 to second quarter 2010,” SIFMA said, “although the media was in fourth quarter 2009.” “The wide range of forecasts reflects the great uncertainty surrounding these markets, and that falling home prices lead much of the downturn.” To inflate, or not to inflate It doesn’t seem like all that long ago that everyone was worried about inflation, a risk that has diminished significantly with energy prices retreating in the past few months. “Disinflation and even deflation have become leading concerns as the standard levels of monetary policy became ineffective in the dysfunctional credit markets,” SIFMA said. “While the mid-year [report by SIFMA] debated the threats posed by skyrocketing energy and food costs, the subsequent, even faster collapse of commodity prices and the distressed condition of the financial markets make inflations a very distant worry, if a worry at all.” But perhaps not as distant as SIFMA proclaims. The study’s own participants voiced at least some concern that easing monetary policy would give way to greater quantitative easing next — or, in plain English, flooding the market with liquidity to see what sticks, and what gets lent out for expansionary goals. Given that the Fed has already pushed monetary policy’s pedal to the metal — exceeding SIFMA’s own estimates in this area — some question over the likelihood of inflationary challenges seems to at least be more greatly in the purview of economists now. Survey respondents were unanimous in their assessment that quantitative easing to some extent is needed to push the economy out of recession. SIFMA noted that only a “minority view” had suggested a moderate or substantial inflationary threat in the future as a result of such a policy; that number, in our view, seems likely to grow, as unpopular a sentiment as it is at current. And such a debate, while seemingly esoteric — or actually estoric, to be more direct — has direct implications for mortgage rates, which is why every mortgage market participant should be paying attention closely. If inflation concerns so much as seep into the market a little bit, watch mortgage rates fly northward, and in a hurry. We’ll be hearing about all sorts of Treasury-led programs designed to bring down primary mortgage rates (but this time, for a really valid reason). Read the full SIFMA report. Write to Paul Jackson at [email protected].

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