U.S. Recession Looms in 2007

CEPR’s Economic Forecast Blames Housing Decline

For Immediate Release: November 29, 2006

Contact: Lynn Erskine, 202-293-5380 x115

Washington, DC:  Weakness in the housing market is likely to push the economy into a recession next year, according to a forecast by the Center for Economic and Policy Research.

Recession Looms for the U.S. Economy in 2007, by economist Dean Baker, predicts that the economic recovery that began in November 2001 will come to an end in 2007. 

“This recovery has been fueled by a housing bubble, just as the late 90s cycle was fueled by a stock bubble,” said Baker. “Now that the housing market has weakened, Americans are looking at a recession in 2007.”

Baker expects that the weakness from the housing market, which is already spreading over to other sectors of the economy, will have an even larger impact in 2007 as consumers lose the ability to borrow against dwindling home equity. With weak consumer demand dampening investment, the economy is likely to shrink by close to 1 percentage point over the course of the year.

Predictions for 2007 (2006Q4 – 2007Q4)

GDP growth -0.7 percent
Job growth -1.2 million
Nominal wage growth 3.4 percent
Inflation (CPI) 2.6 percent
Residential construction 
-12.0 percent
Consumption -1.2 percent
Investment 2.0 percent
Exports 4.0 percent
Imports -2.0 percent
Government expenditures  2.0 percent

Baker also predicts that the Fed will begin lowering rates no later than its first meeting in January 2007 and that unemployment will climb to over 6 percent by the end of 2007.