U.S. Recession Likely in 2008

Morgan Stanley’s chief Asia economist, Andy Xie, predicts that the U.S. has a good chance of entering a recession in 2008 due to inflation pressure leading to higher interest rates.

Sept. 15 (Bloomberg) — The U.S. economy may fall into recession in 2008 as “inflation pressure” drives up borrowing costs next year, Morgan Stanley’s chief Asia economist Andy Xie forecast.

Xie said the U.S. Federal Reserve policy makers have so far persuaded investors that they will contain inflation, helping keep yields on 10-year notes below 5 percent. U.S. consumer prices will increase more than expected, Xie predicts, prompting a bond market selloff.

“We’re headed for stagflation because the bond market believes the Fed,” Xie said in an interview today on the sidelines of the International Monetary Fund annual meeting in Singapore. “Recession will happen when the bond market sees through the Fed and sells off. People will have nowhere to borrow money anymore.”

Wow, I thought I was pessimistic on the economy.

Morgan Stanley’s New York-based chief economist, Stephen Roach, said that while he didn’t share Xie’s view, the “odds of a U.S.-led global recession are rising in the 2007-08 period and cannot be taken lightly.” David Rosenberg, chief North America economist at Merrill Lynch & Co., forecasts a 45 percent risk of a U.S. recession next year.

This seems like the more reasonable approach to take. The data so far points to a weakening economy, and predicting a recession is always difficult to say the least.

FILED UNDER: Economics and Business,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. An old aphorism about predicting 38 of the last 12 recessions comes to mind…

    Personally, I think economists have some work to do to properly factor wildly fluctuating energy prices into their models before I’ll buy into many of their predictions, good or bad. The relatively huge changes up and down in oil prices in such a short period of time is a new phenomenon, making short term predictions highly suspect.

  2. DL says:

    With the MSM media dying to replace Bush along with their liberal friends in the Democratic party, a recession will be talked into birth for “08” anyways -you know that Malaise thing!

    the economic news is alwys 20% better than it really is when libs are in and 50% worse than it realy is when the GOP is in charge.

    Remember Clinton’s free pass from the press when he created for Bush I the “worst economy in 50 years?” When he left office it was no better inspite of having the advantage of the dot.com bubble.