Moody's Investors Service said today in its U.S. ABS conference that the economic overview looks great with a forecast for strong growth in 2011.
However Moody's warned that coupled with this increasingly positive outlook on the economy is also the rise in the firm's risk outlook. Scott Hoyt, senior director from Moody's Analytics, said that an increase in gas prices may have already led to a decline in consumer confidence.
As a result, spending has begun to slow and it is likely that if gas prices climb higher, to around $150 a barrel, the economy could find itself in a recession.
"With that additional risk and with house prices falling again, we expect that decline to be modest and end by the end of year, we clearly could get into a cycle again of declining prices leading to declining equity and [more] foreclosures [which lead to] more declining prices that puts the economy into a negative spiral," said Hoyt.
The main reason Moody's remains positive on the outlook for economic growth is because of the positive numbers seen in the increase of the labor market. Hoyt said that for the past two months, over 200,000 of jobs have been added, setting a pace that has been fast enough to push the unemployment rate down.
Consumers are likely to be less of a driver of the economy and growth in spending likely to trail the overall economy. Hoyt said that this year and next spending will grow at a healthy pace but Moody's forecast growth at a slower pace than the overall economy.
Part of the reason behind the slow growth is because consumer are not getting huge amounts of income from new jobs and the unemployment rate remains high. "
As consumer try to rebuild assets they need to take action that in the last decade they didn't need to do so we anticipate that the savings rate will remain high," Hoyt said. "We are not going to get the kick that we sometimes do around recoveries from a decline in saving as consumers go on a spending spree."
Another constraint on consumers is the still-tight credit conditions. However,there are signs that the credit market is starting to open. Hoyt expects that consumers will start borrowing again as already seen in the auto market where balances are increasing.
He added that lending standards are beginning to loosen as financial firms realize that it's increasingly harder to grow profits without doing more lending.
