Markets & Finance

Recession Watch: Goldman vs. Paulson


Are we in a downturn already? What would a slump look like? Here's a roundup of what the pros are saying

From Standard & Poor's Equity ResearchAre we or aren't we? Wall Street economists, strategists, and government officials are not quite in agreement about whether the U.S. economy is in a bona fide recession, or just experiencing agonizingly slow growth that only feels like a downturn.

Here's what some pros had to say on Feb. 11, as compiled by S&P MarketScope and BusinessWeek staff.

The Recession Is Under Way

Jan Hatzius, senior economist, Goldman Sachs: "There is no longer much doubt in my mind that the U.S. economy is now in recession.

"First, employment seems to be contracting. This is not just because of the decline in January payrolls, but also because the unemployment rate and continuing jobless claims over the past few months have risen at a pace that typically indicates falling employment. Second, the business surveys have weakened sharply over the past month. That's particularly visible in the nonmanufacturing ISM and the Fed's Senior Loan Officer Opinion Survey. Second-tier surveys such as the Philadelphia and Richmond Fed tell a similar tale. Third, the negative feedback loops that define recession are now in full swing, especially the links between falling house prices, rising mortgage credit losses, rising credit restraint, falling homeownership and employment, and further declines in house prices.

"The key question is the depth and length of the recession. I continue to think it will be relatively mild, much closer to the 1990-91 and 2001 downturns than the 1973-75 recession or the 1980-82 double dip."

Recession? What Recession?

Henry Paulson, U.S. Treasury Secretary (S&P MarketScope): Paulson told the G7 weekend meeting in Tokyo he believes the U.S. will continue to post economic growth and "if you are growing, you are not in a recession." Paulson said the "housing correction, high energy prices, and capital market turmoil have combined to weigh on near-term growth," and the American government "clearly needed to act" as it did in passing a $150 billion economic stimulus package last week.

G7 ministers said U.S. output and employment growth have slowed "considerably" and that risks have become "more skewed to the downside."

What a Downturn Could Look Like

Tobias Levkovich, chief U.S. equity strategist, Citigroup: "There seems to be a very high probability of economic recession, with slipping jobs data, limited credit availability, weak retail chain store sales reports, and a surprising falloff in the ISM nonmanufacturing index. With an S&P 500 retreat of about 19% from the October, 2007, high to the Jan. 22 intraday low, it would seem that the bulk of the average market pullback around recessions may have occurred already.

"While the likelihood of a V-shaped recovery seems modest and the notion of a Japan-like L recession is highly unlikely given both monetary and fiscal policy initiatives, many investors perceive a more prolonged U-type model."

An Unhappy Valentine's Day?

Kim Rupert, managing director of global fixed income analysis, Action Economics: "U.S. markets will look ahead to Thursday, Valentine's Day, when Fed Chairman Bernanke, Treasury Secretary Paulson, and SEC Chairman Cox testify before the Senate Banking Committee. There has been speculation the Fed chief might signal another intermeeting rate cut.… While there is risk Bernanke could suggest the economy has indeed entered a recession, we suspect this week's key data will argue against such a conclusion.

"Data on retail sales (Wednesday), trade (Thursday), along with industrial production, trade prices, and the Empire State Manufacturing index should be firm enough to prevent the Fed chief from using the "R" word.

"Indeed, unexpectedly solid data and an optimistic outlook from Bernanke could make for a St. Valentine's Day massacre in bonds and stocks."


Steve Ballmer, Power Forward
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