Exports Steer the Economy

No one is going to look back on the latter months of 2007 and the first part of 2008 as a rollicking good time for the economy. It's going to be a rough couple of quarters, but don't despair: We think we'll escape recession and recover decently in the second half of 2008. Salvation will come from a different direction than you might imagine, however.

Don't expect any help from the housing sector. Home prices could fall another 5% from current levels before stabilizing in 2008 or later, and many markets will suffer worse declines.

We expect slow gross-domestic-product growth of 1.5% to 2% in the first half of 2008, and a 2.5% to 3% growth rate in the second half. But the meltdown in mortgage-backed securities keeps worsening, and we're not out of the woods. Goldman Sachs's chief U.S. economist, Jan Hatzius, says losses to financial institutions could approach $400 billion and result in "a substantial recession" because banks' ability to lend will be crimped. Wells Fargo CEO John Stumpf calls the property market the worst since the Great Depression.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Fortunately, there are enough economic bright spots to neutralize the risk of outright recession. Bright spot number one: After 14 years of worsening, our $700-billion-a-year trade deficit is finally turning around, to the benefit of exporters, manufacturers and multi-national companies.

Standard & Poor's economist David Wyss expects exports to rise 9.5% in 2008 and 8.4% in '09, on top of a 7.3% increase in 2007. The payoff for our $14-trillion economy is huge: In the third quarter of '07, net exports offset the damage to GDP growth from residential real estate woes.

The trade turnaround comes as the U.S. loses its accustomed role of global economic locomotive. That distinction now belongs to faster-growing markets overseas. The dollar, already at a record low against the euro and other currencies, will almost certainly be down for the count again this year. "It's a big, lasting shift, but it doesn't have to be a bad thing -- we don't have to give back some trophy if we're not the global growth engine," says economist Alan Levenson, of T. Rowe Price.

The upside is that U.S.-made goods, ranging from airplanes, farm equipment and machine parts to pharmaceuticals and toothpaste, are priced right for hungry buyers abroad. "A lot of people have given up manufacturing for dead," says Ken Mayland, president of ClearView Economics, in Pepper Pike, Ohio. But they'll be pleasantly surprised, at least into 2010, as currency exchange rates work their way into the global economy, he adds. Outsourced jobs in such fields as engineering and technology may find their way home again, and U.S. tourism should also flourish.

Of course, trade can't carry the day alone. The Federal Reserve Board will likely cut rates at least once, maybe more. By year-end, rates will be on the upswing.

The biggest risk to recovery is the inflationary threat of sustained higher oil prices. But if we meet 2008's challenges and recover from those of 2007, the economic view from farther back on the train won't be that bad at all.