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Recession Outlook Goes Beyond Psychology

While reading a Bloomberg piece by Caroline Baum earlier today, I noticed that the senior U.S. economist at JPMorgan Chase & Co., Jim Glassman, said that the Fed yesterday “could have put an end to this recession discussion, which is a psychological thing right now.” Psychological? Maybe. But the prospect of an economic recession in the United States looks to be based on more than just fear. Take the latest Wall Street Journal survey of economists, for example. On Monday, the Journal said that of the 52 individuals polled:

…the economists, on average, now put the chances of a recession at 38%, the highest in more than three years, and up from 33.5% in November. They also reduced forecasts for U.S. economic growth across the board. They expect the nation’s gross domestic product to grow at an annualized rate of 0.9% this quarter, down from 1.6% in the previous survey, with six economists expecting either a negative or a flat reading. Three economists project an economic contraction in the first quarter, with the average growth forecast at 1.5%, down from 1.9% in November.

Kathleen Camilli of Camilli Economics, “the most pessimistic forecaster in the survey,” according to the Journal, said she sees “the internal dynamics of the U.S. economy deteriorating into recession” this quarter. “Growth will be negative this quarter, nonfarm payrolls will be revised down, and from what I can see, personal-consumption expenditures are rapidly slowing,” the economist added. Also among the bear camp, Ramachandra Bhagavatula, a managing director at New York hedge fund Combinatorics Capital LLC, said:

What is happening is that household net worth is not growing by leaps and bounds — if anything it is going down — [which means] people actually have to start saving out of their current income. That has negative effects on spending growth. In many ways, I think the next five years in this economy could look like Japan after 1990. The big [growth] you got in variety of asset classes — financed by borrowing because of extraordinarily low rates — will come out. When you look at the economic landscape, stock prices are too high, house prices are too high, and you put all the pieces together and the size of the adjustment needed seems reasonably large. How many years does it take? Who knows? It doesn’t necessarily mean we have five years of recession — maybe just 3-4 quarters of recession.

Echoing such sentiment, economists at Morgan Stanley said Monday that the U.S. economy will likely go into recession in 2008. MarketWatch noted that Morgan Stanley is the first major Wall Street firm to predict a recession. Chief economist Richard Berner and U.S. economist David Greenlaw in an updated forecast on the firm’s Global Economic Forum web site said that domestic demand is expected to fall 1% annualized over the next three quarters with zero growth in gross domestic product and a 5% to 10% drop in corporate earnings. For the full year, Morgan Stanley sees 1% growth.