A recession may be coming, but not to worry, ISS hears

by Bob Haavind, Editorial Director, Solid State Technology

The “R” word is spiking in the media, and even in blogs, speakers told concerned execs at the Industry Strategy Symposium (ISS) at Half Moon Bay, CA (Jan. 14). But 2008 is far from 2001, they were reassured by Nariman Behravesh, chief economist and EVP for Global Insights, a forecasting firm with some 350 economists.

For one thing, media talk about a recession is only half what it was during the dot-com bust, and this time high-tech will fare much better than it did back then. Chances are only 50% that we will see a US recession this time, and if so it will be mild, and overseas markets should keep high-tech markets perking even if the US slows down, Behravesh predicted, especially with the continuing weakness with the US dollar.

His biggest concern is a possible boom-bust in China, following the Beijing Olympics this August, since the emerging nations, especially in the western Pacific, where growth is now strongest of any region, depends heavily on trade with China. Behravesh pointed out that every sector in the Chinese economy is reported to be growing faster than the national average, which suggests that total growth is stronger than the 11% being reported.

In spite of efforts by the Chinese government to slow growth, fixed asset investment is still rising 30%/year, he said. Still, he considers the current Chinese business cycle to be moderate so far, and sees the chances of a hard landing (which in China is still 5%-6% growth) at one in three. Behravesh explained that China’s economy must grow at least 8%/year just to absorb excess labor; otherwise there will be a recession which will greatly impact emerging markets.

Bill McClean, of IC Insights, along with other speakers, pointed out that China’s efforts to slow its economy would remain half-hearted until after the Olympics. Still, he expects China to grow 10.5% in 2008 after 11.5% growth in 2007. A big concern there, he added, is 18% inflation in food prices, which could stir unrest.

A number of speakers expect global economic growth to slow some this year, perhaps from 3.7% in 2007 down to 3.3%, according to Dean Freeman, research VP, Gartner Dataquest. But this will be only a mild slowdown, so the weak US dollar means that exports could help compensate for a slowdown in the US.

The US has a “double shock” economy, Behravesh said, requiring at least two forces to slow it down, and this has come with high oil prices and the housing slump. As job growth and capital spending by industry are slowing in the first quarter of 2008 (see Figs. 1-2, below), the US economy is vulnerable to a third shock, even a mild one, he suggested.

Meanwhile, Behravesh expects the Federal Reserve to cut interest rates another 100 basis points this year, but any fiscal stimulus would likely be too late to do much good if a mild recession does develop early this year.

Several factors would keep a recession mild if it does come, he explained. Even with oil prices quadrupling, inflation is down. Interest rates also are already lower than in 2001. Corporate profits still remain strong, although growth has slowed recently. He also pointed out that the impact of falling housing prices will have much less impact on household net worth than the sharp drop in the stock market did in 2001.

The housing bubble is the epicenter this time around, Behravesh said, while there are no excesses in inventories or capital spending in the high-tech sector. He expects continuing weakening of the dollar well into 2008, which will help boost US technology exports (see Fig. 3 below). While he expects developing economies to decelerate, it will not be as much as in the US. High commodity prices will keep their economies strong, he believes, and most have built strong reserves. At the same time, a flight from risk could constrain some investment there. If commodity prices fall, however, this would strongly impact developing nations. — B.H.


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