Economists' crystal ball remains cloudy

ShareThis

It's traditional in January to predict what will happen to the economy and markets during the next 12 months. These predictions invariably miss what turns out to be the year's biggest story.Looking back at stories from this time last year, nobody was predicting that cracks in the subprime mortgage market, which were already appearing, would cause the credit markets to seize up, spill over into unrelated investments such as money market funds and municipal bonds, cost the chief executives of Merrill Lynch and Citigroup their jobs and lead to foreign governments bailing out some of our largest financial institutions -- with nary a peep of protest."It's always the things you are not looking for that kill you. People talk ad nauseam about all these things they're worried about. It's always something out of the blue that is the problem," says Jason Trennert, chief investment strategist for Strategas Research Partners.I asked a variety of experts what they think will happen in 2008 -- and what could stun us from out of the blue.Although surveys put the odds of a recession in 2008 at 40 to 50 percent, most of the experts I spoke with say we will avoid one, albeit narrowly.Their reasons: Despite all the drama in housing, the labor market remains reasonably strong, which will fuel consumer spending. The weak dollar is making U.S. exports more competitive, which will help corporate earnings. And lower interest rates and the presidential election will produce lots of economic stimulus.The biggest risks: that the credit crisis worsens, that an unprecedented decline in housing prices produces unforeseeable results and that the Fed's efforts to fight recession will ignite inflation."We think that overall GDP growth will be soft in the first quarter but pick up steam as we move through the year," says Dean Maki, chief U.S. economist with Barclays Capital.Trennert agrees that, "We'll skate past (a recession), but it's going to be a close call. The thing I'm watching most closely are weekly unemployment claims and the (monthly) employment report." The unemployment rate has been hovering between 4.4 and 4.7 percent the past 12 months. As long as it stays in that range, a recession is unlikely."The Fed can't (lower interest rates) enough to solve the housing market. That's going to take years to sort out. What it can do is ease enough to stimulate other parts of the economy which have not experienced a bubble. Capital spending is one of them," he says.Trennert sees the Standard & Poor's 500 stock index gaining about 12 percent this year.His biggest worry "has to do with a crisis of confidence in the credit markets." in which "no amount of easing the Fed could do" would encourage companies to lend money. In that case, "the whole credit market shuts down."The proverbial global glut of savings is helping ease those concerns. "You have these vast sums of money accumulating in China, the Middle East. They're putting money to work where there are problems. The greatest argument against a recession is that nobody wants to see it happen."Sam Stovall, S&P's chief investment strategist, uses the initials EIEIO to summarize his rosy outlook for this year. They stand for employment, inflation, earnings, interest rates and oil."Even though housing has come down quite dramatically ... we see employment remaining healthy. We don't see unemployment breaking 5 percent. Because of that, we don't think we will have a consumer-led recession," he says. "And even though inflation is creeping higher, the Fed is focused on fighting recession and will probably let inflation be a '09 or 2010 event."Oil is a wild card, he says. "We think it could moderate and more likely head toward $80 (per barrel) than break sharply above $100."Stovall sees the S&P 500 rising 12 to 14 percent this year.The biggest risk: "That banks continue to hold very tightly to their purse strings and do not lend to corporate borrowers, which could pretty much undo the employment support, which could throw the consumer into much more of an economic tailspin," Stovall says.Asked to guess what could surprise us out of the blue, Maki says inflation. "If we are correct that growth will be picking up as we move through '08, the inflation picture is likely to get worse. I think that's the risk that is not being focused on," he says.Trennert says the dollar could surprise us. "I think the dollar is going to rally significantly," he says, as foreign investors continue to see U.S. assets as a great bargain.E-mail Kathleen Pender at kpender(at)sfchronicle.com. (Distributed by Scripps Howard News Service, www.scrippsnews.com.)