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Economists in Poll Expect
Credit Turmoil to Continue

November 15, 2007; Page A4

The credit crisis weighing on markets still has some time to play out and consumers may have a tough slog ahead, according to economists in the latest forecasting survey. But confidence in the Federal Reserve's ability to navigate the rough economic waters remains high.

See and download forecasts for growth, inflation, housing and more. Plus, evaluating Fed communications, market expectations on rates and more. Survey conducted Nov. 2-7.

When asked about the credit crisis and related market turmoil, more than half of the economists said it was about half over, while 25% said it still is in its early stages. Just 15% said the credit troubles are over or mostly over.

"I don't think it's close to being over," said David Resler of Nomura Securities. "I think we're not halfway through the duration of the correction."

Some 28% of the economists said the credit crunch is the biggest downside risk to their forecasts. The concern came in second only to housing, which drew 30% of the responses. Oil came in third with 16%, while the stock market and falling dollar barely registered.

Indeed, many see the credit crisis exacerbating the continuing problems in the housing market. "This is a vicious housing bust. We could be going through the bursting of an asset-price bubble," said Allen Sinai of Decision Economics Inc., who expects a major effect on consumer spending, which remains the main driver of gross domestic product.

The Wall Street Journal surveys a group of 55 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. For prior installments of the semiannual and monthly surveys, see:

When asked if the problems in the housing market will spill over into consumer spending, about four out of five economists said "yes."

"The potential declines in home prices can put a significant drag on consumer spending," said Mr. Resler, who notes that the effects may not show up for some time. "It took a long time after the tech bubble burst for it to show up in consumer behavior."

"Lenders have further tightened lending standards, which will constitute a major headwind for the would-be extractor of home equity to finance spending," said Richard Berner of Morgan Stanley in a research note. "While we believe that fears of a full-scale credit crunch are overblown, mortgage credit availability is already tighter than in the 1990 credit crunch period."

Despite the risks, the economists still aren't expecting the worst. On average, they see just a one-in-three chance of recession, virtually unchanged from last month's survey. And while expectations, on average, for GDP growth were lowered again (to 1.4% in the fourth quarter and 1.9% in the first quarter next year), none predicted contraction through next year.

[Down, Not Out]

"Certainly tightening of lending standards is a concern, but it's not at levels that would give us a recession," said Joseph Carson of AllianceBernstein. "If most of the market still has access to credit, there's no reason the economy can't grow."

Part of the reason economists' pessimism hasn't increased is the action of the Federal Reserve. Some 77% of the economists agreed that the Fed did the right thing by cutting interest rates by a quarter-percentage-point last month. On average, they expect the Fed to hold rates steady at the next Federal Open Market Committee meeting, which is next month. But they see one more quarter-point cut by June.

"The impact [from the credit crisis] should be less dramatic because the Fed is cushioning," said Mr. Carson. "That's a fine line to travel and they've done it pretty well."

Even Mr. Sinai, who thinks the Fed will be unable to stave off the problems of the housing bust completely, concedes "they're probably doing as well as one can expect. Much of what they've done is very creative and brilliant."

However, with so much uncertainty in the market, the central bank isn't out of the woods. "I think they've provided a higher level of confidence," said Mr. Resler. But, "the Fed needs to look at a way to broaden its toolkit."

Among other findings of the survey:

 The economists expect a 1.02% decline in the Office of Federal Housing Enterprise Oversight home price index for 2007, a slightly narrower drop than was seen last month, and a 2.57% fall in 2008. However, any decline would be the first ever registered by the index.
 The average forecast for crude prices rose sharply to $88.22 by the end of this year, and to $79.81 by June. However, the forecast remain below recent highs of $98 a barrel. Amid this fall's high oil prices, expectations for growth in the consumer price index hit 3.4%, up from 3% last month.
 The average gains in non-farm payrolls over the next 12 months were forecast at 92,233, up for the second consecutive month, after hitting a low of 82,740 in September.

Write to Phil Izzo at

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