Most Economists Say Recession Has Arrived as Outlook Darkens

The Wall Street Journal

The U.S. has finally slid into recession, according to the majority of economists in the latest Wall Street Journal economic-forecasting survey, a view that was reinforced by new data showing a sharp drop in retail sales last month.

"The evidence is now beyond a reasonable doubt," said Scott Anderson of Wells Fargo & Co., who was among the 71% of 51 respondents to say that the economy is now in a recession.

The Commerce Department said Thursday that retail sales tumbled 0.6% in February; sales excluding volatile auto and parts decreased 0.2%. The decline reflected a sharp slowdown in consumer spending, the primary driver of U.S. economic growth, as Americans grapple with high gasoline prices and the credit crunch, as well as drops in home values and other asset prices.

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The survey, conducted March 7 through March 11, marked a precipitous shift to the negative from the previous survey conducted five weeks earlier. For example, the economists now expect nonfarm payrolls to grow by an average of only 9,000 jobs a month for the next 12 months -- down from an expected 48,500 in the previous survey. Twenty economists now expect payrolls to shrink outright. And the average forecast for the unemployment rate was raised to 5.5% by December from 4.8% in the previous survey.

Much of the gloom stemmed from last Friday's employment report, which showed a loss of 63,000 jobs in February, the second consecutive monthly decline. "My recession call comes from the employment data," said Stephen Stanley of RBS Greenwich Capital. "It struck me as a recessionary number."

Twenty-nine of 55 respondents said they expect the economy to contract in the current quarter and 25 expect it to do so in the second. The average of all the forecasts is for meager growth -- just 0.1% at an annual rate in the current quarter and 0.4% in the second.

Although the classic definition of recession is two consecutive quarters of declines in the gross domestic product, Mr. Stanley pointed out that the National Bureau of Economic Research, the nonpartisan organization that is the official arbiter of when recessions begin and end, doesn't necessarily follow that definition. "If you go back to the 2001 recession, there was only one negative GDP quarter, and there might not even be one negative quarter in this recession," he said.

The economists also expressed growing concerns that a 2008 recession could be worse than both the 2001 and 1990-91 downturns. They put the odds of a deeper downturn at an average 48%, up from 39% in the previous survey. Mark Nielson of MacroEcon Global Advisors said that "we recognize the previous two recessions were mild and, if a recession does occur, it is likely to be slightly worse than the previous two."

Amid the concerns about the economy, respondents expect more action from the government and the Federal Reserve. Some 63% said the use of public money to deal with the housing crisis is now likely or certain, while on average they expect the Fed to lower its benchmark federal-funds rate to 2% by June from the current 3%.

Futures markets Thursday priced in certainty of at least a 0.5 percentage point cut in the Fed's rate target and up to 90% probability of a 0.75 point cut. Officials had, prior to this week, appeared unconvinced a 0.75 point cut was needed, given signs that inflation psychology is worsening. But those views may have been affected by continued upheaval in credit markets and the weak retail sales and employment data. Market participants say this would be a risky time to cut less than investors expect. The Fed will have to weigh the urgency of addressing the continued credit crunch against the risk of appearing unconcerned about inflation.

However, the Fed's job may be complicated by inflation concerns. The economists raised their average forecast for consumer-price increases to 3.5% by June, up from 2.7% in the prior survey. The change reflects persistently high oil prices and a 4.3% jump in prices last month from the year before. February's CPI data will be released Friday, and economists surveyed by Dow Jones Newswires expect a 4.5% increase from a year ago.

Even as the Fed has made clear that it is most focused at the moment on threats to economic growth, some central bank policy makers have continued to voice concerns about the possibility of resurgent inflation. The central bank has used unconventional methods to boost liquidity in the market; its goal is to limit the use of its bluntest weapon, interest-rate reductions, which can fuel price pressures.

Meanwhile, most forecasters expect a recovery to begin in the second half of this year, as the government's stimulus package and the Fed's interest-rate cuts begin to spur the economy. By the end of the year, the economists expect inflation still to be hovering at an uncomfortably high 2.7%, raising the question of when the Fed will start raising rates.

Some 84% of economists in the survey said the Fed was too slow to raise interest rates in 2003, and policy makers don't want to repeat that mistake. But "it's going to take some time even under the best of circumstances before the Fed can be comfortable that the economic situation has stabilized," said Bruce Kasman of J.P. Morgan Chase.

One thing is clear: The darkening economic outlook has made Ben Bernanke's job less secure, especially with a new president about to enter the White House. The economists gave the Fed chairman just a 59% chance of being reappointed in 2010. "If a Democrat is elected he won't be reappointed, and [presumptive Republican presidential nominee John] McCain may opt for another, too," said David Resler of Nomura Securities. "The problems occurred on his watch," added Ram Bhagavatula of Combinatorics Capital.

Write to Phil Izzo at philip.izzo@wsj.com

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