BUSINESS WATCH:

It hasn’t been a sterling few months for the U.S. economy. The housing market has dipped, foreclosures have hit record highs in California, and the National Retail Federation predicted in September that the holiday season would experience the lowest sales growth in five years. Then, last week, the Federal Reserve issued a gloomy forecast for 2008, which foresaw a drop in inflation but also a decrease in gross domestic product (GDP) growth and a rise in unemployment.

Do Americans have reason to worry as they head into the holiday months and beyond? The Daily Pilot quizzed Peter Navarro, a professor at UCI’s Paul Merage School of Business and economic pundit for the Los Angeles Times, National Public Radio, CNN and other media. Navarro predicted tough times ahead.

Do you think the economy is headed toward a recession?

It’s clearly headed toward a slowdown and for most Americans that will feel like a recession. Technically, a recession is a negative GDP growth rate over several quarters, but we’ve gotten so accustomed to steady economic growth over the last 15 years or so [that] if we go down to zero growth, it’s going to feel like a recession. Whether or not we technically go into a recession, we are definitely slowing down. There’s no question about that.

Does the housing market play a part in the downturn?

No question about it. The housing market basically was the primary stimulus of consumption since about 2002. Basically, people were using their homes like ATM machines, taking equity out and refinancing and spending that money. That was a tremendous stimulant to growth, just as the tech bubble was a stimulant in the late 1990s. Now, that stimulus is no longer there, and that’s causing lots of issues.

How will this affect the value of the U.S. dollar around the world?

A slowdown in the U.S. economy forces the Federal Reserve to lower interest rates. Lower interest rates in the U.S. drive foreign capital invested in the U.S. offshore, and that drives down the value of the dollar. We’re already seeing that effect with the dollar being close to record lows.

What will be the consequences of inflation going down?

I don’t necessarily agree with that. If the dollar continues to decline, that is inflationary because it drives up the price of the foreign imported goods we buy, and we buy a lot of them. So I don’t buy that premise. I think that’s wishful thinking. The argument that inflation will fall is predicated on the notion that a slowing economy will create deflationary pressures. If the dollar is going down and the price of Chinese goods in Wal-Mart and BMWs and Toyotas is going up because of the decline in the dollar, then that’s another set of effects entirely. The bottom line with inflation is, I think we’re going to be paying more for food and energy for a long time.

Are there any positive signs you see in the economic forecast?

To be honest, no. We’re in a difficult situation here.

What is your forecast for Newport-Mesa?

This is a very heavy area for real estate development and financing industry, and these sectors will continue to be hit hard by this slowdown. New home buyers in the O.C. in the last several years will likely see a significant loss in home equity as real estate prices slide.

MICHAEL MILLER may be reached at (714) 966-4617 or at michael.miller@latimes.com. MICHAEL MILLER may be reached at (714) 966-4617 or at michael.miller@latimes.com.