2008 Annual Outlook: What's to Come in The Year Ahead?

I. Executive Summary

The outlook for the national economy continues to depend upon how well the consumer navigates through four major headwinds: the housing slump, rising energy costs, a tightening credit environment, and a weakening job market.

The American Consumer - 4

• Consumer spending will slow, but not collapse in 2008, as job and income growth underpin continued gains. Despite slower average employment gains in the coming year, job growth should be sufficient to produce wage and salary gains of around five percent.
• The slowdown in consumer spending coupled with steady income growth means that income growth will outpace spending growth for the first time in five years. As a result, the saving rate will rise.
• Growth will not be uniform, many areas will face sharper declines in home prices, and these adjustments will weigh heavily on local economies.

Housing & Residential Construction - 8

• Housing will continue to decline into the new year and we do not expect any meaningful recovery on a national basis before the end of the decade. Many areas are facing longer workout periods.
• Prices need to decline as much as 20 to 30 percent in markets such as California and Florida, where the run-up in home prices has created severe affordability issues for potential residents. Nationally, prices will need to decline only 10 to 15 percent from peak-to-trough.

Interest Rates - 11

• The Fed will need to cut the federal funds rate twice more in the first quarter. Recent actions suggest the Fed is committed to ensuring liquidity and the stability of global money markets. However, with renewed growth in the U.S. economy and lingering concerns of inflation, the FOMC will be in a position to begin tightening by year-end.
• Treasury yields will remain range-bound in the coming year, and newfound steepness should remain in the curve in the coming year.
• The Fed's coordinated action with other major central banks may not be a cureall for the credit market problems, but it was certainly a step in the right direction. We look for LIBOR-to-Treasury spreads to narrow after the year-end pressures subside.

The Dollar - 14

• The Dollar may have reached a bottom in its five year slide recently. It should begin a slow move higher against European currencies by the second half of 2008, when foreign central banks will be easing into the face of renewed Fed tightening. However, we look for the greenback to depreciate further versus most Asian currencies.

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Wachovia Corporation
http://www.wachovia.com

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