Economists Weigh Recession Scenarios President Bush on Monday predicted that the economy will avoid a recession this year. While it's hard for officials to utter the word "recession," a new poll shows that 61 percent of Americans believe the economy is already in one. More and more economists say the same.
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Economists Weigh Recession Scenarios

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Economists Weigh Recession Scenarios

Economists Weigh Recession Scenarios

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From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.


And I'm Melissa Block.

President Bush said today that the U.S. economy is in what he called a period of uncertainty, with heightened risks to our near-term economic growth. That's from the president's latest annual economic report, which he signed and sent to Congress today. The report predicts the U.S. economy will avoid a recession this year.

Over the weekend, G-7 central bankers and finance ministers meeting in Tokyo also expressed concern about slowing growth in the U.S. They also predicted the U.S. would skirt a recession.

As NPR's John Ydstie reports, all that official reassurance is running into a lot of skepticism.

JOHN YDSTIE: It's hard for officials to even utter the word recession. They have to keep a stiff upper lip and try to keep confidence high. But it's possible that battle is already lost.

A new Associated Press-Ipsos poll reported today that 61 percent of Americans believe the country is already in recession. More and more economists believe that too.

Mr. BERNARD BAUMOHL (Managing Director, Economic Outlook Group): This economy is very, very weak.

YDSTIE: That's Bernard Baumohl of the Economic Outlook Group.

Mr. BAUMOHL: We do see the economy shrinking this quarter. And for the second quarter, it's going to be very, very weak as well. It's just going to feel quite awful and it's going to result in the unemployment rate increasing and consumers cutting back on more spending.

YDSTIE: While he believes the economy is shrinking right now, Baumohl isn't quite willing to predict a recession, roughly described as two consecutive quarters of economic contraction.

Mr. BAUMOHL: Well, if you're pinning me down, I will say that we will, by the root of a hair, formally escape a recession. But I don't think anyone's going to feel the difference between a recession and the kind of weak growth that we're going to experience the rest of this year.

YDSTIE: While Baumohl remains on defense, many economists are moving into the recession camp. Among them are forecasters at big Wall Street firms including Merrill Lynch and Goldman Sachs, and at market intelligence firms like Global Insight, where economist Brian Bethune and his colleagues have just released a new forecast.

Dr. BRIAN BETHUNE (Director of Financial Economics, Global Insight): For the first half of 2008, we're expecting a mild recession. In other words, a couple of (unintelligible), relativity will decline by modern amounts.

YDSTIE: Not a sharp downturn, says Bethune, but employment will fall and housing-related industries, financial services, and building materials, for instance. Strength in export industries like aircraft, technology and software and farm equipment will help keep the recession shallow. And the stimulus package will help keep it short, he says. That's the most likely scenario, says Bethune.

But Global Insight also believes there's a chance, a 25 percent chance of a longer, deeper recession brought on by the failure of a large financial institution toppled by bad mortgage-based investments.

Dr. BETHUNE: Then that would be the affair of very large domino. And we know what happens in the game of dominoes. When a large domino goes down, it takes down a lot of dominoes, smaller dominoes. So that is the biggest risk.

YDSTIE: This meltdown in the financial system would likely cause credit to get even tighter, strangling potential growth. Mark Zandi of Moody's thinks a short recession is most likely, but he also thinks a longer recession is a real possibility.

Mr. MARK ZANDI (Chief Economist, Moody's It could last well into 2009. It could be something different than that. It could be - we suffer a classic recession to claim back (unintelligible) to the summer and fall. And then we have stop and go kind of growth after that for a couple of three years if the economy just can't find it's groove similar to what Japan has suffered of the past decade, not to the same degree but to a degree.

YDSTIE: To avoid this scenario, Zandi believes policymakers need to start thinking about creating a government entity to buy up bad mortgages, to clear up the picture in the financial markets so credit can flow again.

Mr. ZANDI: It would be very analogous to the RTC that the federal government established back in the early '90s to resolve the savings and loan crisis to the credit crunch of that era.

YDSTIE: In that case, the government created the Resolution Trust Corporation, which took over failed banks and auctioned off their assets. At the end of the day, that effort cleaned up the banking system and saved taxpayers a significant amount of money.

John Ydstie, NPR News, Washington.

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