Bloomberg's John Berry on why a recession is unlikely in 2008

Bloomberg columnist John Berry has a piece entitled "A Recession Shouldn't Be in Your 2008 Forecast" which presents one case for why a recession is unlikely this year. He says:

Some analysts were predicting a recession would hit the U.S. economy in the fourth quarter as consumers, hurt by falling house prices and the high cost of gasoline, cut spending.

It didn't happen, and there's no reason to think it's going to this year either.

Economic growth will be slow in the first half of 2008, and the unemployment rate, which was still a low 4.7 percent in November, is likely to rise. Housing sales and construction will continue to be a drag for months to come.

On the other hand, economic growth should accelerate in the second half of the year as financial-market conditions and the U.S. trade deficit improve, the housing drag lessens and the effect of the 100-basis-point cut in the Federal Reserve's overnight lending-rate target in recent months begins to kick in.

Some optimistic analysts believe growth might rebound to a 3 percent rate in the second half.

Given the turmoil in financial markets, the risk of a recession is hardly zero. Nevertheless, the current state of the economy simply doesn't show the signs usually associated with one.

He also notes that:

Many of the forecasts calling for a recession are based on an assumption that large losses associated with subprime mortgages and the securities backed by them will force banks to reduce lending big time. The resulting credit crunch will undermine business investment and consumer spending, the forecasters say.

There are scant signs of that happening.

The summary of the most recent survey of economic conditions conducted by the National Federation of Independent Business and released on Dec. 11 said, ``There is no `credit crunch.'

``Only three percent of the owners cited the cost and availability of credit as their number one business problem,'' the summary said. ``Thirty four percent reported all their credit needs met compared to 4 percent who reported problems obtaining desired financing, typical of readings for the past few years.'' 

Part of John's case is based on a forecast released last week by Mickey D. Levy, chief economist at Banc of America Securities, who I happen to know from personal experience is extremely sharp and on top of both economics and banking. John quotes Mickey as saying that:

``Large banks have adjusted their portfolios, but they haven't reduced their regular lending,'' he said. They have cut back the leverage and lines of credit to hedge funds, venture capital funds, mortgage brokers and the housing sector.

``But to the rest of the non-financial sector they are making all the good loans they can while applying their existing lending standards more rigorously,'' Levy said. ``And as far as I can tell, the 8,000 or so other banks are largely unaffected by this.''

-- Jack Krupansky