US recession: A long slump?

Whether the world's biggest economy is in recession will not be known until later this year at the earliest, but a growing number of analysts have already made the call.

"Our view is edging closer to recession, albeit a mild one," said Joseph LaVorgna, economist at Deutsche Bank in New York, reacting to a spate of weak economic reports.

A key question is whether interest rate cuts by the Federal Reserve and a stimulus package passed by Congress will spark fresh growth or if the efforts will be, as economists say, "pushing on a string."

The recession camp was bolstered in recent days by shockingly weak reports on job creation - showing the first loss in employment since 2003 - and a survey showing a contraction in the massive US services sector for the first time since the 2001 recession.

Data 'seals recession deal'

The latest data "pretty much seals the deal on the recession call," said Myles Zyblock, analyst at RBC Dominion Securities.

"The question now turns to how long and how deep this contraction might be."

Even at the Federal Reserve, where officials have generally avoided the "R" word, some officials have let the word slip out.

Richmond Federal Reserve Bank President Jeffrey Lacker said that while he sees sluggish growth, "I can also see the possibility of a mild recession, similar to the last two we have experienced - in other words, shallow and with a slow recovery."

Morgan Stanley economists Richard Berner and David Greenlaw said in a note to clients, "Recession has arrived, in our view, heralded by intensifying weakness in incoming data, and the economy faces a rocky road ahead."

Berner and Greenlaw added however that the downturn will be limited and that 2008 as a whole will show modest growth of 1.3% after declines in the first two quarters.

They said the likely impact of tax rebates from the economic stimulus plan will provide a temporary boost but that a strong recovery is not likely until 2009, when they see growth at 2.7 percent.

Others see a more ominous scenario and say the central bank and other officials have been slow to react.

Evidence piles up

Merrill Lynch economist David Rosenberg said evidence of a recession is piling up with dismal figures from the Institute of Supply Management services sector report, "the collapse in auto sales" in January and "unprecedented tightening in credit conditions."

This "adds to our concern that we are facing a much deeper downturn than we saw in 2001," and means the Fed may be forced to make an emergency rate cut before its next meeting March 18.

Nouriel Roubini, a New York University economist, who has been bearish on the economy for over a year, said most indicators "are heading south and suggesting a deep and severe recession that has already started."

Roubini said the Fed is moving aggressively because it "is seriously worried about this vicious circle and about the risks of a systemic financial meltdown."

Joseph Quinlan, economist at Bank of America, said that regardless of whether a recession develops, the so-called "misery index" - the sum of unemployment and inflation - has reached a three-year high of 9.1%, a sign of growing trouble.

"With the US economy already on thin ice... the higher the misery index in the coming months, the greater the odds of a consumer-led US recession," Quinlan said.

"The latter, in turn, could trigger a vicious circle of more job cuts, rising unemployment and an even greater level of retrenchment on the part of US consumers."

RBC's Zyblock said the Fed rate cuts and economic stimulus efforts will help ease the downturn.

"We believe it to be highly premature to characterize current policy efforts as impotent," he said.

"Policy makers have learned from the script of post-1989 Japan and the US experience of the 1930s that today's collapse in real estate should be treated as an ominous deflationary threat. We believe policymakers have begun, and will continue, to attack the problem with the seriousness it deserves."