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Morgan Stanley Jumps Aboard the Bandwagon

Written By Brian Hicks

Posted December 12, 2007


The list of analysts calling for a recession in 2008 continues to grow.

And the latest to join the chorus this week has been Richard Berner of Morgan Stanley, which is notable since Berner has been known as the "resident bull" there in the past.

A mild U.S. recession is now likely, with no growth for the year ahead,” Richard Berner, chief U.S. economist for Morgan Stanley in New York, said in his weekly note to clients earlier this week.

Berner’s Morgan Stanley thus joins Merrill Lynch which forecast a recession a week ago.

Meanwhile, Goldman Sachs reckons there’s a 40-45% chance of a recession even if the Fed cuts rates quickly to 3% next year.

From the Telegraph by Ambrose Evans-Pritchard entitled: Morgan Stanley issues full US recession alert

"Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads.

In a report "Recession Coming" released today, the bank’s US team said the credit crunch had started to inflict serious damage on US companies.

As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers," said the report, written by the bank’s chief US economist Dick Berner. He said the foreclosure rate on residential mortgages had reached a 19-year high of 5.59pc in the third quarter while the glut of unsold properties would lead to a 40pc crash in housing construction.

"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," he said.

Although the US job market has apparently held up well, an average monthly fall of 138,000 in the number of self-employed workers over the last quarter suggests it may now be buckling. "Consumers face what could be a perfect storm," said Mr Berner.

Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia and Europe will come to the rescue as America slows.

Mr Berner said US demand is likely to contract by 1pc each quarter for the first nine months of 2008, but the picture could be far worse if the Federal Reserve fails to slash rates fast enough. It is betting on a quarter point cut this week, with three more cuts by the middle of next year. "We expect the Fed to insure against the worst outcome," he said.

The bank at first treated the August crunch as a "mid-cycle correction", much like the financial storm after Russia’s default in 1998. But the collapse of the US commercial paper market has now continued for seventeen weeks, suggesting a "fundamental deleveraging of the banking system."

2008 is shaping up to be one interesting year.

The bottom in housing is nowhere in sight.