WASHINGTON (Reuters) - Recession risks have increased amid weakness in housing and financial markets but “real America” is still doing just fine, a top White House economic adviser said on Tuesday.
“Obviously, the chances of a recession are higher now than they were a year ago, but we still think it’s less than 50:50,” Allan Hubbard, economic advisor to President George W. Bush, told CNBC television during an interview.
“I don’t know what it is, but the bulk of the economy is doing just fine. We obviously have problems in the housing sector and we have problems in the financial sector, but ... real America is doing just fine,” he said.
A collapse in the U.S. market for subprime mortgages has spurred a global financial credit crunch and unnerved investors who fear the world’s largest economy is heading for a fall.
Goldman Sachs earlier lowered its U.S. economic growth forecast and said the risks of a recession had mounted to 40-45 percent, from about one third before.
In addition, former U.S. Treasury Secretary Lawrence Summers wrote in the Financial Times on Monday that the fallout from the subprime crisis meant “the odds now favor a U.S. recession that slows growth significantly on a global basis.”
The United States last suffered a recession between March and November 2001, according to the National Bureau of Economic Research, a 10-year gap from the previous episode.
A recession is sometimes seen as two consecutive quarters of negative growth, but NBER has a broader definition. It says a recession occurs when there is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.
Goldman projected U.S. growth slowing to 1 percent on an annualized basis in the first half of next year before picking up, and it expects the economy to expand by 1.8 percent in 2008 overall. This lies well below the economy’s average pace between 2001 and 2006 of 2.7 percent.
Goldman expects the slowdown will force the Federal Reserve to cut interest rates to 3 percent by mid-2008, a somewhat deeper easing than currently implied by financial futures markets, which see rates around 3.5 percent by July.
The Fed lowered interest rates by a quarter percentage point last month to 4.50 percent and has now eased a total of 75 basis points since the credit crisis erupted in August.
It expects growth to slow to between 1.8 and 2.5 percent in 2008 from around 2.5 percent this year as the wilting housing sector crimps wider activity. But it expects the economy to remain supported by ongoing consumer spending, thanks to still-low unemployment.
Hubbard also stressed the bigger picture.
“Foreclosures are going to increase. We expect that, with all these subprime mortgages. At the same time, it is a small percentage of our overall economy. We’ve got a gigantic economy,” he said.
Mortgage losses have inflicted painful losses on some big international banks, weakening their balance sheets and forcing them to seek fresh cash to shore up their finances.
In fact some analysts say the weaker dollar, which has plumbed record lows against the euro as growth worries mount, has exposed the country’s top firms to foreign takeover.
But Hubbard said that plans by Citigroup Inc (C.N), the largest U.S. bank, to sell a stake to the Abu Dhabi Investment Authority for $7.5 billion was an endorsement of the United States as a destination for investment.
“I think what is important about that investment is that it reinforces the fact that America is great place to invest. That is why foreigners want to invest here,” he said.
Reporting by Alister Bull; Editing by Andrea Ricci