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Wells Fargo Economists: Economy Continues to Slow, Recession Unlikely in ’08


The fallout from the housing slump and the so-called “credit crunch” will prove less severe than many fear, said Wells Fargo’s senior economists during the company’s annual economic forecast teleconference earlier this week.

“Healthy export growth and continued business spending will help the economy steer clear of an outright recession, but I believe that won’t be significant enough to prevent an economic slowdown in 2008,” said Dr. Scott Anderson, senior economist for Wells Fargo & Company. “Rapidly cooling earnings growth and rising economic uncertainty will make U.S. companies reluctant to undertake ambitious expansion plans in 2008.”

Dr. Jim Paulsen, chief investment strategist of Wells Capital Management, however, says he remains optimistic about the U.S. economy. “The stock market is within 5 percent of all-time highs and eight out of the 10 economic sectors in the S & P 500 are up 6 percent or better which has given a 4 percent bond yield. More than 95 percent of people in the U.S. who want to have a job have one and they’re still spending. Retail sales for the first two months of the last quarter were better than expected and the global economy has more contributors to growth then ever before.”

“The big story here,” Paulsen added “is that while housing spending has taken a full percentage point off real GDP growth, it’s been totally offset by a percentage point gained in trade. For the first time in about 15 years, export growth is adding to real GDP growth, and it will continue as the dollar continues to weaken.”


The economists agree that despite a slower U.S. economy, there is no guarantee it will slow inflation. They predict consumer inflation to remain near 4 percent, driven by global demand for food, commodities and oil.

Dr. Eugenio Aleman, senior economist for Wells Fargo & Company, said his two biggest concerns are the credit crunch and inflation. “Inflation is the most pressing problem for the Federal Reserve today,” said Aleman. “The rate of inflation has been increasing the past several years – such increases take a long time to build into the system, into expectations, into our daily lives. And once they do, it’s very difficult to get rid of the problem. The longer we take in slowing down inflation, the more difficult and risky it gets for the Federal Reserve and the economy.”

Consumer Spending and Labor Market

The economists agree consumers will feel a little tapped out after the holiday season, and that’ll affect their spending behavior. “The interest rate pain relievers prescribed by the Fed will take at least six months to take effect and may not be strong enough to deaden the financial pain,” said Anderson. He forecasts a 1.8 percent growth rate in consumer spending next year, down from 2.8 percent in 2007. “Tighter credit and lender standards are playing a role, but the primary driver of the weakening consumer is the labor market, with payroll growth down to a paltry 0.8 percent.”

Anderson forecasts a 5.1 percent unemployment rate by the third quarter of 2008 and says a rising unemployment rate could magnify housing and consumer spending problems. “Many Americans appear to be one job loss away from mortgage default and bankruptcy. If unemployment rates rise more than expected, banks would respond by further restricting credit, home prices would fall below current expectations of a 10 percent national decline, and we’d see a downward spiral in the economy.”

Reporters can hear a full recording of the December 18th teleconference until January 19, 2008 by dialing 1-800-642-1687 (U.S. and Canada) and conference ID #25100528. A webcast of the call is available at through January 19, 2008.

Note: Comments by Wells Fargo’s economists during the teleconference are their own opinions and should be attributed to them as individuals, not to Wells Fargo & Company.

Wells Fargo Economists

Dr. Jim Paulsen is chief investment strategist of Wells Capital Management. He develops investment strategies that assist in the management of separate institutional account assets as well as mutual and collective investment funds. He focuses on national and global macro-economic trends, specifically investments, and interest rate forecasting.

Dr. Scott Anderson is a senior economist for Wells Fargo & Company. He analyzes and forecasts international, national and regional economic trends with a focus on macro-economic and interest rate forecasting, financial markets, international economics and the California economy.

Dr. Eugenio Aleman is a senior economist for Wells Fargo & Company. He analyzes and forecasts international, national and regional economic trends. He specializes in interest rate forecasting, international trade and finance, the Texas economy, and Latin American economies.

Wells Fargo’s Economists offer their economic analysis at: and

Wells Fargo & Company is a diversified financial services company with $549 billion in assets, providing banking, insurance, investments, mortgage and consumer finance through almost 6,000 stores and the internet ( across North America and internationally. Wells Fargo Bank, N.A. is the only bank in the U.S., and one of only two banks worldwide, to have the highest credit rating from both Moody’s Investors Service, “Aaa,” and Standard & Poor’s Ratings Services, “AAA.”

Wells Capital Management (WellsCap) is a registered investment adviser and a wholly owned subsidiary of Wells Fargo Bank, N.A. WellsCap provides investment management services for a variety of institutions. T
he views expressed are those of the WellsCap representative and are subject to change. They are shared for educational purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product. The information is based upon information we consider reliable, but its accuracy and completeness cannot be guaranteed. Past performance is not a guarantee of future returns. As with any investment vehicle, there is a potential for profit as well as the possibility of loss. For additional information on Wells Capital Management and its advisory services, please view our web site at, or refer to our Form ADV Part II, which is available upon request by calling 415.396.8000.


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