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Merrill Lynch Says U.S. In Recession

Back on December 20, the Toronto-based Globe and Mail said a recession probability indicator at Merrill Lynch was signaling a 100% probability for a U.S. recession within the next 12 months.   Earlier today, the Telegraph (UK) said Merrill Lynch is the first major bank to declare that a recession in the world’s biggest economy is now underway. An American publication, the Small Business Times, reported that David Rosenberg, chief North American economist for Merrill, wrote in a research note to clients this morning that:

Friday’s employment report confirmed our suspicions that the economy was transitioning into an official recession towards the end of last year… At no time in the past 60 years has the unemployment rate risen 60 basis points (50 bps is the actual cutoff) from the cycle low without the economy slipping into recession, and here we now have the jobless rate hitting 5 percent in December vs. the March/07 trough of 4.4 percent.

According to the paper, Rosenberg cited contractions in hours worked and household employment, and concluded:

In sum, Friday’s employment report strongly suggests that an official recession has arrived. The recession dating committee at the National Bureau of Economic Research (NBER) will be the final arbiters, but since it waits for conclusive evidence, including benchmark revisions, it may be at least two years before we are notified.

This weekend, Bloomberg reported that president of the NBER and Harvard University economist Martin Feldstein said the odds of a recession had risen to more than 50 percent after the December employment report. Feldstein told Bloomberg:

We are now talking about more likely than not… I have been saying about 50 percent. This now pushes it up a bit above that.

The Wisconsin-based Small Business Times said that the assessment by Merrill Lynch’s Rosenberg was validated in another Wall Street research note also posted Monday morning. Morgan Stanley economists Richard Berner and David Greenlaw wrote:

Incoming data suggest that tighter credit has pushed the US economy to the brink, and we reiterate our call for a mild U.S. recession in the first half of 2008. Weak employment data and slowing in export orders reported by purchasing managers undermine the case that a healthy consumer and strong global growth would forestall a downturn. Moreover, the ongoing housing recession is deepening, declines in capital goods bookings hint that business equipment spending will contract, and inventory liquidation seems likely. Our headline growth forecast for 2008 is unchanged at 1.1 percent using year-on-year arithmetic, but that largely reflects a stronger-than-expected 4Q07… Most of the weakness is concentrated in the first half of the year.

The economists concluded:

The key question now is how deep the recession will be and how long it will last. We continue to expect that the downturn will be comparatively mild and short; after all, recessions abroad are unlikely, so global growth will still be a prop; US excesses are modest away from housing, and peaking inflation should give the Fed latitude to ease monetary policy further. However, the slide in job growth hints at near-term downside risks… The bad news, moreover, is that surging energy prices represent an additional threat to such wage gains when adjusted for inflation, and more broadly higher energy quotes threaten real income and spending. Because the recent oil price hikes are more the product of shocks to supply than demand, they will depress global growth and push up inflation.