Could the outlook for 2008 get any worse for Republican political strategists? On Monday Morgan-Stanley became the first big Wall Street investment bank to formally call for a recession in 2008. (Thanks to Calculated Risk for the tip.)
We expect domestic demand to contract by an average 1 percent annualized in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10 percent over that longer period. Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth -- for us, long the key bulwark against a downturn -- is slowing.
Lest any readers get the idea that How the World Works is actively rooting for a recession, so as to ensure Democratic control of both Congress and the White House, let me hasten to note that recessions are not good news for anyone -- particularly people who are employed by advertising-supported media organizations. A recession will make it more difficult for politicians to bite the bullet on energy constraints and greenhouse gas emissions, and will stimulate protectionist and anti-immigrant sentiment. Recessions suck.
That being said, they suck more for the political party that happens to control the White House when they occur, as George Bush's father learned all too well in 1992. And we're not about to shed any tears for that group of bunglers.
Morgan-Stanley has historically been the gloomy gus of Wall Street economic forecasters, but the report by Richard Berner and David Greenlaw is still notable for its resolutely downbeat tone, even if the authors do stress, twice, that they think the upcoming recession will be "mild."
Some high (or low) lights:
- "First, compared even with a few weeks ago, financial conditions have tightened significantly further as the price of credit has risen and lenders have made credit less available."
- "As delinquencies and defaults soar, lenders and investors are tightening credit for commercial, credit card and auto lending, as well as for mortgage borrowers."
- "...Tighter lending standards will depress housing demand further. But even if demand stabilizes, so large is the supply-demand mismatch that builders must slash single-family housing starts by 40 percent from current levels to eliminate the inventory of unsold homes. As a result, we think overall housing starts will run below one million units in each of the next two years -- a level not seen in the history of the modern data since 1959."
- "...Jobless claims are weakening; the rise to 340,000 on average over the past four weeks is a two-year high. With wages decelerating, income gains are slowing significantly. (As an aside, revised data show that the level of wage and salary income is $45 billion lower than previously thought)."
- "Finally, a faltering economy will create uncertainty, which itself is the enemy of growth. It will impair willingness to lend and dampen animal spirits."
Say what? Animal spirits?
It is at moments like these that my lack of formal training in economics becomes most apparent, because, as I quickly learned, anyone with a modicum of expertise in these matters would recognize the allusion to the economist John Maynard Keynes, who used the term "animal spirits" to describe the sense of optimism or naïve confidence that an entrepreneur requires to soldier on in the face of near certain failure.
From his 1936 classic, "The General Theory of Employment Interest and Money:"
"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits -- a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
Words to live by.
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