MercoPress. South Atlantic News Agency

Growing consensus that the “feared US recession” is here

The feared recession in the US economy has already arrived, according to a report from Merrill Lynch. It said that Friday's employment report, which sent shares tumbling worldwide, confirmed that the US is in the first month of a recession.

Its view is controversial, with banks such as Lehman Brothers disagreeing. An official ruling on whether the US is in recession is made by the National Bureau of Economic Research, but this decision may not come for two years. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months". It bases its assessment on final figures on employment, personal income, industrial production and sales activity in the manufacturing and retail sectors. Merrill Lynch said that the figures showing the jobless rate hitting 5% in December were the final piece in that puzzle. "According to our analysis, this isn't even a forecast any more but is a present day reality," the report said. It added that the current consensus view on Wall Street that there is a good chance of avoiding a recession is "in denial". It also objected to the use of euphemistic terms for the state of the economy. "To say that the backdrop is "recession like" is akin to an obstetrician telling a woman that she is 'sort of pregnant'," the report said. On Monday US Treasury Secretary Henry Paulson anticipated further indications of slower economic growth in the coming weeks and months. The rise in housing inventories "will contribute to a prolonged adjustment, and poses by far the biggest downside risk", Paulson said before the New York Society of Securities Analysts. However, "while growth looks to have slowed considerably in the last part of 2007, our economy remains resilient and I expect it to continue to grow", he added pointing out that there will be no quick announcement of a fiscal stimulus package. "Working through the current situation and getting the policy right is more important than getting the policy announced quickly", he said, noting twice that "no single policy or action will undo the excesses of the last few years". Paulson said that at this time of economic turmoil, investors "will remain cautious" about funding new mortgages until they are confident that prices have stabilized. He said that investors and buyers will be particularly reluctant to invest in sub-prime mortgages, which are not currently securitized by Fannie Mae (NYSE:FNM) or Freddie Mac (NYSE:FRE), and in jumbo mortgages which do not qualify for Government Sponsored Enterprise securitization. As for capital markets, Paulson said "we should not be surprised or disappointed to see financial institutions writing down assets and strengthening balance sheets". Paulson characterized the action as "market discipline", which he says "should enhance market confidence over time". Finally he praised financial institutions for building equity, particularly in the second half of 2007. "Some may be concerned that much of this financing came from overseas investors; I am not". He added "when the world invests in the United States, it is the ultimate vote of long-term confidence in our economy and our companies".