Lehman Brothers Economist Drew Matus Offers His Economic Outlook
Monday, September 24, 2007SUZANNE PRATT: Earlier today, I spoke with Lehman Brothers economist Drew Matus about his outlook for the U.S. economy. I began by asking him about the GM strike and his thoughts about the potential effects on GDP growth.
DREW MATUS, SENIOR MARKET ECONOMIST, LEHMAN BROTHERS: While I think it's really going to depend on how long the strike lasts, if it lasts long enough, it will start showing up in the employment data, which is already weak and will make people more nervous about the state of the labor market in the U.S. Then it will also potentially impact inventories and production, both of which will be a very modest drag on GDP. Assuming it only lasts a short period of time the longer it lasts the bigger the impact there will be.
PRATT: You recently cut your GDP forecast now at 1.5 percent from 1.8 percent for the first half of next year. That was before the GM announced they are going on strike. What kind of impact if the strike were to go on for a few months could a strike have on GDP?
MATUS: Well, you know, assuming worst case scenario, you'd be looking at a few tenths, but I don't think we're quite there yet. It would have to be very long lived. It would have to spread a wide degree and it would have to be no offsetting impact from other sources. So I think for now I'm pretty confident that our second half - or first half of 2008 forecast is good and solid as it is. And I wouldn't be looking to change it any time soon.
PRATT: Let's talk about that cut to your forecast. Why did you cut it?
MATUS: We cut it because we got the housing story wrong. We had expected housing would rebound -- not rebound but just stop falling. Unfortunately it hasn't. And so because of the level of inventories in the housing market right now, we think that starts basically new production has to flow even more dramatically than it already has. And that will have secondary effects on things like pricing of homes and therefore on consumption and the U.S. consumer and their willingness to spend money. When you added that all up, the number of small marginal changes we made to our forecast made us take down our first half of 2008 forecast from 1.8 percent to 1.5 percent. It doesn't sound like a lot, but just enough to basically green light the Fed cutting rates.
PRATT: So where do you think we are in that housing recession? How far along are we?
MATUS: I think we've got another year of direct housing drag. So the drag from construction of homes somewhere right half percent for the next four quarters. If we look into the secondary aspects of it all, we can see another year or two where home prices are just mediocre to down depending on where you live. And that's going to have negative impacts on consumption and peoples' willingness to basically make big ticket item purchases. People are going to feel less confident and people are not going to want to spend as much money. So I think where we're nearing the end of the first stage and we're moving towards the second stage. But the second stage isn't any better than the first.
PRATT: We have a lot of data coming out this week a lot of economic data. What do you think is going to be the most significant piece that we're going to get and why?
MATUS: I think it's going to be the housing data. We have new home sales and existing home sales, both of which are likely to be quite weak. If for some reason we get a pick up in either one of those, it's going to be very important for the marketplace particularly because the Fed just cut rates. And so if there's any spark of life in the housing market, it's going to make people nervous because one of the things after the Fed cut rates that people on Wall Street were concerned about is that maybe the Fed is allowing too much inflation to develop. If we start to see any sort of rebound in economic activity, people are going to hit the panic button on the inflation side and it's going to really make people nervous and it's going to make it very difficult for the markets.
PRATT: I want to just get in one last question. We just have few seconds left. Let's talk about oil. We have oil at $80 a barrel. Everybody was saying $80 is the real pressure point for the economy. But it doesn't seem to be that way any more. Is $80 not such a potentially bad thing for the economy?
MATUS: I don't think it is. I think this is the case where the fashion world has it right. Sometimes brown is the new black. Sometimes 90 is the new 80 and it really depends on your frame of reference for the U.S. consumer. $80 might not be enough per barrel of oil to make difference now. It might be 90. It might be 100. There's got to be new shock value to make a difference.
PRATT: OK. Let's leave it there. Thank you, Drew.
MATUS: Thank you.
PRATT: My guest, Drew Matus of Lehman Brothers.
