Recession looks more certain, but it may be short

Email|Print| Text size + By Robert Gavin
Globe Staff / February 10, 2008

After another round of troubling economic reports, a growing number of analysts are downgrading forecasts to show that the United States has slipped into recession. Now they are asking the question: How long will it last?

For now, many economists forecasting a recession expect it to be short and mild, running through the first half of the year. The Federal Reserve's deep interest rate cuts and a plan approved last week by Congress to put billions of dollars in rebates in consumers' pockets should work their way into the economy by the second half of the year. That will fuel a rebound, economists said.

"We're forecasting the shortest and shallowest recession in post-World War II histo ry," said Gus Faucher, economist at Moody's of West Chester, Pa. "The Fed is on the ball and moving aggressively, and the federal stimulus package will be kicking in."

If the national economy goes into recession, Massachusetts won't be able to avoid it, economists said. But, they said, the state won't suffer as severely as it did in the previous two recessions, which were deeper and longer here than in the nation as a whole.

Those downturns, among the worst in the state's postwar history, each involved a crash in the state's vital technology sector. In the early 1990s, the minicomputer industry collapsed, compounding a real estate bust driven by speculative building. And the dot-com crash led the 2001 recession.

"We don't have those factors this time around," said Alan Clayton-Matthews, a University of Massachusetts at Boston professor who studies the state's economy. "It doesn't mean we won't go into recession with the rest of the country, but we might fare better."

This time around, the bursting of the housing bubble has led the economy towards recession. Economists have debated for months whether the United States would slip into recession, roughly defined as at least six months of negative economic growth, or avoid it.

Since by definition a contraction must last several months to qualify as a recession, economists won't know for sure until later in the year. Many economists still say the US economy will slow dramatically, but won't fall into recession.

Bill Cheney, chief economist at John Hancock Financial Services, said claims for unemployment insurance, a key indicator of the job market, remain below recessionary levels. Incomes are rising.

And he said the worst of the housing slump appears over.

"I'm not ready to throw in the towel," Cheney said. "There's enough positive things to say we're going to stagger through."

But other economists said evidence that the six-year-old economic expansion has come to an end is mounting. Recent reports showed the sharpest contraction of the service sector since the 2001 recession, and the first loss in payroll jobs in four years. And stock markets continue to plunge: The Dow Jones industrial average last week lost 561 points, or 4.4 percent.

"Up until last week, I thought we were going to skirt a recession," said Robert B. MacIntosh, chief economist for Eaton Vance Corp., a Boston investment firm. "I've changed to the view we're in a recession that will be short and shallow."

Keeping the downturn short and shallow: Low interest rates. The Fed cut its benchmark rate 1.25 points in January alone, and many economists expect further cuts in coming months. Cutting interest rates boosts the economy by lowering borrowing costs, encouraging consumers and businesses to spend. The benchmark rate now stands at 3 percent, the lowest since May 2005.

Meanwhile, Congress last week approved a $168 billion package that aims to boost consumer spending by sending checks of $300 to $1,200, and in some cases more, to individuals, couples, and families. Consumer spending drives about 70 percent of economic activity.

Still, some analysts said, these measures won't prevent a deeper recession. Nouriel Roubini, an economics professor at New York University, said the downturn began in December and will last at least a year. "It's the worst housing bust ever and getting worse. The consumer is shopped out. There's a financial crisis and credit crunch," Roubini said. "It all adds up to a longer and more protracted recession."

T.J. Marta, fixed income and economics strategist at RBC Capital Markets in New York, added that interest rate cuts and traditional response to a slowing economy may not be the right medicine. This downturn is different than earlier recessions in that it involves complex credit instruments tied to risky mortgages known as subprime. Many large financial services firms invested in securities backed by subprime mortgages, and as borrowers have defaulted on these mortgages during the housing slump, the securities have become worthless, creating billions of dollars in losses and undermining financial markets.

The extent of the problems remains unclear, but could be widespread, Marta said.

"The complexity of the credit issues are beyond the comprehension of most people on Wall Street, let alone on Main Street," Marta said. "They represent a tentacle throughout the financial system. We're not sure how to detangle it without the whole thing coming down."

Robert Gavin can be reached at

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