Will the Financial Crisis Lead to a Prolonged U.S. Recession Despite the Bailout Package?
  • Roubini: the Treasury plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession
  • After stronger than expected growth in Q2-08 boosted by rebate induced consumer spending and export growth, GDP growth is expected to weaken significantly in Q4-08/Q1-09 as consumption is expected to contract (rising job losses, falling wage/asset income, high debt, tightening credit), along with slowdown in capex (high borrowing cost, weak corporate earnings, elevated production costs), softening exports (slowing G-7 and Em growth, stabilizing USD); fuel and commodity prices in spite of easing will remain elevated; longer housing correction and financial turmoil might lengthen the recession and lead to a slow and sluggish recovery
  • Fed: Downside risks to growth over the next few quarters due to financial turmoil, contracting housing sector, softening labor market, consumer spending, export growth, and tighter credit conditions
  • IIE: Sluggish consumer spending through 2009, and declining contribution of net exports to GDP ahead will lead to modest negative growth in H2-08 (0% or negative) and modestly positive growth in H1-09; 2008 growth:1.5%, 2009: 1.3%
  • Alliance Bernstein: Weakening 6-mo diffusion index on leading indicators; slowdown in growth even before financial crisis worsened will impede economic recovery resulting in a longer trough (U-shaped recovery)
  • Bloomberg Survey: Growth will weaken to 0.7% in Q4-08 and 1.1% in Q1-09 and 1.8% in 2008 as financial crisis worsens, consumers and firms face tight credit conditions
  • Wachovia: Continued weakness in labor market implies consumer spending will decline in H2-08; high production costs, low demand will cause corporate profits to decline in H2-08
  • Goldman Sachs (not online): GDI (a better indicator) is showing more weakness than GDP; Contraction in employment, industrial production, real sales at the turn of 2007 indicates economy dipped into recession during that time; rebounding in mid-2008 on fiscal stimulus; but starting Q3 a contraction in consumer spending esp. on services (due to fading impact of rebates, declining consumer/auto credit, home equity credit lines, employment, high food and energy prices), persistent weakness in housing and financial sector (home prices will bottom only in early 2009 and bank losses continue), fading boost from net exports (slowdown in EU, Asia), spillover of slowdown to other sectors (state/local govt spending, capex) will thus lead to -2% growth in Q3-08, 0% in Q4-08 and Q1-09 with a sluggish recovery; but no deep downturn due to structural factors (weaker multiplier effects: tighter inventory control, capex, hiring, exports supporting manufacturing sector)
  • Merrill Lynch (not online): Peaking of 4 determinants of recession indicate recession began during Oct-07-Feb 2008; real GDI growth (which is a better indicator than GDP in recognizing the start of A recession) was negative in Q4-07 and Q1-08; GDI witnessing a much weaker trend than GDP; Amid slowing capex, decline in manufacturing employment GDP growth will be roughly flat in Q3 (0.8%), negative in Q4-08 (-2%) and Q1-09 as net export contribution declines; we won't see a recovery until mid-2009 at the earliest; GDP growth forecast 2008: 1.8%; 2009: -0.5%; longer duration of recovery is a bigger risk than magnitude of decline in growth
  • JPMorgan: Amid declining capex, credit constraints in housing, auto, growth will be flat in Q3-08 (0%) and contract -0.5% in Q4-08 and Q1-09
  • TD: Econmy will improve only starting H2-09 and growth and consumer spending will rebound only in 2010; 2008 growth:1.7%; 2009: 1.1%
  • Feldstein: U.S. may now be in a very long recession that will drive the unemployment rate higher. Downturn began in Dec-07/Jan-08 but recovery not on the horizon; exports not strong enough to support economic recovery and impact of tax rebates will fade in H2-08; further rate cuts will not be effective in stimulating growth; higher taxes (as proposed by Obama) will prolong the downturn
  • IIF: Sub-par growth through 2009 on weak disposable income, consumer spending in H2-08 (impact of lower gas prices offset by end of rebates) and housing and inventory adjustment offset by weaker boost from exports, along with weak hiring (no major lay-offs), capex and commercial construction
  • Fed's Stern: continued modest expansion (though with further rise in unemployment and decline of inflation) due to better 'initial conditions' compared to previous downturns like lower unemployment, interest rates, inflation, and financial condition of banks and corporate sector
  • Krugman: U.S. may have an L-shaped recession as home prices are yet to fall to pre-bubble levels; unemployment may continue to rise; growth may remain sluggish until 2010-11 even after the official recession is over, esp. as the Fed battles modern asset-based recessions fueled by interest rate cuts
  • Via FT: Stronger than expected H1-08 (led by rebates-induced consumption, exports in spite of negative monthly GDP growth); but recent intensification of housing and financial sector crisis, reinforced by oil-led inflation, and the time lag b/w financial crisis and the impact of credit squeeze on real economy and back on the financial sector may lead to negative growth at the turn of 2008
  • Berner (Via FT): 50% probability of a W-shaped recession as consumers buffered by rebates are facing increasing financial pressure
  • Fed revised 2008 GDP growth forecast upward from 0.3-1.2% in April to 1-1.6% in June; kept unemployment rate forecast unchanged at 5.5-5.7%; it kept the 2009 GDP growth forecast unchanged at 2-2.8% but raised the unemployment rate forecast to 5.3-5.8% from 5.2-5.7% in April
  • IMF: Weak 2008 as GDP will grow at 1.3% y/y in 2008 led by H1-08 growth but economic activity will deteriorate in H2-08 (as higher food and gas prices and tighter credit conditions hit consumer spending); growth will recover gradually in 2009 at 0.8% y/y; need to keep interest rates on hold with housing and banking sector targeted stimulus packages and contingency measures and regulatory reform for financial sector (rather than generalized fiscal stimulus)
Sep 28, 2008