|Residential Lighting: What’s your forecast for 2007?
Martin Regalia: We’re looking at 2.5 percent growth—or maybe a tad better—in the first half of 2007, and closer to 3 percent growth in the second half.
RL: Any chance of a recession?
MR: There’s always a chance for recession. In the first part of 2006, I would have put the chances of recession over 12 months at probably about 15 percent. Now, the chances are probably 25 percent.
RL: What are the issues?
MR: Housing is the real issue. Housing weakened a lot. There was a lot of speculation—a lot of spec buying, investment buying—and that went out the window. That’s what caused the big declines that we witnessed in terms of starts, sales and home prices.
We’re going to see the housing market stay very soft through the first half of 2007. But I don’t see it deteriorating at anywhere near the rate that we saw in 2006. Probably sometime in the second quarter, we’ll see early signs of it starting to improve.
RL: Will consumers pick up the slack by buying more home furnishings?
MR: Refurnishing existing homes? There’s a possibility, but I don’t see much in the way of new furnishings in 2007 when new home sales
are as soft as they are. I don’t see demand for furnishings looking anything like they did over the last couple of years. The softness in this economy is centered in the housing market, and I think any facet of that market is going to feel the pain.
RL: How does the consumer fit into the equation?
MR: General consumer consumption has slowed, but it hasn’t fallen out of bed. And the feared contagion—a weak hous-ing market causing weak consumption in general—has not yet materialized. That doesn’t mean it won’t. But given that the decline in housing is bottoming out, we don’t see a tremendous amount of contagion spreading to the overall consumption area.
The consumer’s real income [income adjusted for price inflation] is growing nicely. All this press about no growth in real income is a bunch of baloney. Real incomes have actually gone up quite nicely of late. And
income is what drives con-sumption. As long as real income growth is there, we should get continued consumer spending. It’s not going to be anywhere near the pace we saw in 2005 and in the early part of 2006,
but it doesn’t have to be to keep us out of a recession.
RL: Any other concerns?
MR: Energy prices could spike again, and we’re concerned that the housing sector might continue to weaken. But, at this point, we still anticipate a couple of quarters of low growth followed by modest improvement. A recession is not a high probability in our forecast.
Dr. Martin Regalia is Vice President and Chief Economist at the U.S. Chamber of Commerce. He has also served at the Congressional Budget Office and for the Board of Governors of the Federal Reserve System.