Lehman Joins Ranks of Recession Forecasters

Lehman Brothers has joined the chorus of economists who say the economy is sliding into a recession.

“We now believe the tax rebate checks will arrive too late to prevent an outright recession. We look for modestly negative GDP growth in both” the first and second quarters of 2008, chief economist Ethan Harris wrote in a research note.

Lehman Brothers joins economists from Global Insight, Goldman Sachs, Morgan Stanley, UBS, The Northern Trust and Merrill Lynch in forecasting a recession. Recession is often defined as at least two consecutive quarters of GDP contraction. The National Bureau of Economic Research, the private outfit that dates recessions, doesn't use the two-quarter definition. It says "a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

“The economy is likely to experience an extended period of very weak growth, a rising unemployment rate and significant further Fed rate cuts,” Mr. Harris wrote. “This is a bigger, but more gradual, shock to the economy than either the 1990 or 2001 recession.”

Lehman’s announcement came on the heels of today’s unexpected drop in nonfarm payrolls, but Mr. Harris said cited many factors for the change in outlook. “The construction recession appears to have moved into the non-residential sector. Soft data like the purchasing manager's indices and consumer confidence have fallen into recession territory. Energy prices continue to surprise on the upside and with wage growth flat, consumption is being squeezed. Talk of stagflation is another blow to confidence. Most important, asset markets continue to weaken,” he wrote. –Phil Izzo