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Merrill Lynch Economist: U.S. Already In Recession

Tuesday, 08 Jan 2008 12:19 PM

By Kenneth Williams

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The U.S. economy has entered into its first major recession in 16 years according to David Rosenberg, chief North American economist for Merrill Lynch, who declared the downturn in a research note to clients released on Monday.

Mr Rosenberg wrote: "According to our analysis, this [recession] isn't even a forecast any more but is a present day reality."

He points to the four key barometers used by the National Bureau of Economic Research (NEBR) - employment, real personal income, industrial production, and real sales activity in retail and manufacturing.

He wrote that these "seem to have peaked around the November-December period, strongly suggesting that we are actually into the first month of a recession."

Other Rosenberg points:

  • At no time in the past sixty 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% in December versus the March/07 trough of 4.4%.

  • Aggregate hours worked in the economy contracted at a 0.4% annual rate in 4Q, and this comes on the heels of a 0.6% decline in 3Q. Back-to-back declines in total hours worked have always been associated with recession.

  • The breadth of the report was also very poor with the diffusion index slipping below the 50 cutoff mark, just like ISM, to 48.4% from 52.2% in November. A number below 50 indicates that a plurality of industries are now in the process of cutting jobs outright - heading into the last recession, this index fell below 50 in February 2001 and the recession began ... exactly one month later.

  • The level of unemployment is up 13% YoY, again a development that has always been consistent with past recessions. The YoY rate of change in the level of the unemployed who have been idle for at least 15 weeks is particularly ominous - +20%, which is a pace that prevailed in the early stages of prior economic downturns (hitting this trend in April/01 and in Aug/90 when the recessions were one-month old).

  • And we have Household Employment contracting 49,000 in 4Q and the YoY trend slowing to +0.2% in December from +2.2% a year ago, another classic recession signal. Consider for a second that in March of 2001 that trend was running at +0.8%, and in July of 1990 the pace was +1.1% - those two months represented the onset of a technical recession and yet the trend in Household jobs is weaker now than it was then.

    Richard Berner and David Greenlaw, economists for Morgan Stanley, disagreed, writing, "Incoming data suggest that tighter credit has pushed the U.S. 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...

    "Most of the weakness is concentrated in the first half of the year."

    Berger and Greenlaw added, "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; U.S. 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."

    Merrill's Rosenberg concluded: “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.”

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