One on One with Richard Berner, Chief Economist at Morgan Stanley
Wednesday, December 12, 2007
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SUSIE GHARIB: Our guest tonight told his clients this week that he's predicting a recession, a mild one for the U.S. economy. Joining us now to explain, Richard Berner, chief economist of Morgan Stanley, the first major investment firm calling for a recession forecast. Hi Dick.
RICHARD BERNER, CHIEF ECONOMIST, MORGAN STANLEY: Hi, Susie. How are you?
GHARIB: I'm good, thank you. Given the Fed's emergency actions today, are you changing your forecast about a recession?
BERNER: No, we're not, Susie. The Fed's actions today address a longstanding problem that we've had in the markets that addresses the liquidity issue, but it really doesn't change my view. It gives me a little more comfort that the recession that I'm talking about is likely to be a mild one. It doesn't change the call, however.
GHARIB: You're saying no growth in 2008, zero. Why now? What's changed that you came out with this forecast?
BERNER: Well, let me just correct that just a little bit. I'm saying no growth over the four quarters that will end in the fall of 2008. So if we take the current quarter and look at the next three quarters after that, in those four quarters we expect no growth. And the reason that we made this change is that we saw three things unfolding. One is that financial market conditions were getting tighter. And what the Fed did today will partially alleviate that. Second, we saw downside risk to capital spending. Businesses have maintained capital spending growth in positive territory, but as the economy slows and as pressure on corporate profits and margins, I think there's downside risk and we're likely to see a mild contraction there. Perhaps the newest news is that what's happening in the U.S. is also starting to happen abroad. We're starting to see slower growth in overseas markets. And whereas many of us, including me, had counted on strong overseas growth to be a support for the U.S. economy and for earnings, that strong support is starting to fade a little bit.
GHARIB: Dick, we've seen the government, we've seen the Federal Reserve, other central banks around the world taking actions to avoid a recession, rather to prop up the financial system. Is there anything else it can do to avoid this recession?
BERNER: Susie, monetary policy and any policy actions taken now will affect the economy in the future, not today. So I think what the Fed does in the future and of course, what they've done today will perhaps mitigate the downturn and that's what I'm hopeful of. But I think that as I look at it right now, we're in for at least several months of very sluggish to no growth.
GHARIB: Let me see if you can pin down a timetable on this. Recessions, as we know, are followed by recoveries. When do you see that happening?
BERNER: Well that's even harder to figure out than the recession but you're absolutely right. We shouldn't lose sight of the fact that recessions are followed by recoveries. My best guess is that it will begin late next year. The housing downturn in that part of the economy is likely to last longer, but I'm hopeful that by 2009 we should be into a moderate recovery and with it should come a recovery in corporate profits.
GHARIB: Tell us a little bit about what that recovery is going to be like. What can we look forward to?
BERNER: Well, I think we can look forward to the finally in 2009 the start of the end, if you can put it that way, of the housing downturn. I think you can look forward to better job gains and income growth for consumers. And right now I think we're going to be looking at very sluggish gains in consumer spending, probably no growth there. And finally I think you can look forward to an upturn in capital spending. But of course a lot can go wrong with forecasts and this one is predicated on the idea that growth overseas still stays stronger than it is here and that adds a layer of support for the U.S. economy. That's a critical ingredient.
GHARIB: Dick, thank you so much for coming on the program, very insightful information.
BERNER: Thanks, Susie.
GHARIB: My guest tonight, Richard Berner, chief economist of Morgan Stanley.
