No Arguing About It, US Recession Is 'Already Here'

Source : The Business Times, February 25, 2008

It'll be over by end of 2008 but initial recovery mild, says Lehman strategist

The United States recession is already here, though some economists still argue about it, said Jack Malvey, Lehman Brothers chief global fixed income strategist. But it's really not that bad, and certainly not the end of the world.

The good news is that the credit recession of 2007-2008 will be resolved by the end of this year.

The bad news? The recovery will be mild, at least initially, said New York-based Mr Malvey who was in town last week.

Since 1945, recessions have occurred about every five years and averaged 9-10 months, said Mr Malvey.

In the US, what began as the sub-prime crisis last June - and which has now spread to other sectors of the economy - has created widespread negative sentiment.

And the popular media has capitalised on this, said Mr Malvey who met with reporters last Friday.

Since the beginning of 2008, he noted, some of the programmes on cable TV have included specials on the Black Death of 1346-1348 and its possible re-occurrence, the fate of the Earth once all humans are gone, the catastrophic effect of a mega-methane eruption from the floor of the Pacific Ocean and life-ending gamma rays from the detonation of a nearby supernova.

The US recession will over by end-2008, with slow recovery next year and clear blue skies in 2010, said Mr Malvey.

'I think that the US recession will be over (by end-2008) to the degree that actually we have found to be in recession. Fiscal stimulus puts money in the hands of consumers in the third quarter, monetary policy will have been accommodative for a year as of September 18, 2008,' he said.

The US Federal Reserve started to cut interest rates last September in response to the credit freeze and, more recently, the United States Congress has approved a US$152 billion stimulus plan to rescue the ailing US economy.

'The uncertainties of certain aspects of this credit recession will be resolved, we'll know the fate of the monolines (insurers) for example, CDOs (collateralised debt obligations) write-offs will mercifully have petered out, so I think a lot of elements will contribute to a resurrection in terms of the US economy,' said Mr Malvey.

But it will be a slow recovery, U-shaped rather than V-shaped, he said.

'2009 will be ... a slow growth, slowly healing US economy. So (we'll be) out of technical recession possibly before the end of this year .... moving into a sort of extended healing process.

'It's probably 2010 before we have clear blue skies again in the US and because these things move in different velocities around the world, maybe some regional economies start their recessions, slow down a little later and may heal a little later, maybe they're still in recovery mode in 2010,' he said.

He was most optimistic about Asia where he said the average growth will exceed that of the US, Europe and Latin America.

Japan is the most at risk, being the Asian economy closest to the US, according to Mr Malvey. He said that Japan has 40 per cent risk of succumbing to recession at the end of 2008.

'Other parts of Asia, we do not see high risk of succumbing to outright recession in the course of this year and next,' he said.