Morgan Stanley economists Richard Berner and David Greenlaw think rebate checks and strong export growth helped sustain an unexpected bounce in the first half of 08. Unfortunately, they also think this has just postponed the inevitable:
The US economy has thus far proved more resilient than we thought: We now estimate that first-half real growth ran at a 1¼% annual rate, while just a month ago we thought that the economy had been essentially flat in the first half of the year. That sizable difference owes importantly to tax rebates lifting consumer outlays sooner than we expected, plus the apparent resilience of business outlays for capital spending and the effect of strong growth abroad on US exports.
As these temporary effects fade, however, Berner and Greenlaw see a downturn emerging in Q4, which will persist until the second quarter of 2009:
Nonetheless, we think that economic durability won’t last. In our view, the combination of tight financial conditions, higher energy quotes, higher global inflation and weaker global growth will soon promote a mild downturn. Specifically, we think that the economy will contract by a 1% average annual rate in the fourth quarter of 2008 and the first quarter of 2009, and that the economy will be flat over the four quarters ending in the second quarter of 2009.
More specifically Berner and Greenlaw see 4 vicious circles which will perpetuate current economic weakness:
…we think that four adverse feedback loops will undermine future growth: The housing-credit interplay is undermining consumer wealth and ability to borrow. The supply-induced surge in energy prices will probably depress US and global growth. A profit and lending squeeze will likely slow capital spending and hiring. Finally, rising inflation and inflation expectations have promoted tighter monetary policy in Europe and elsewhere.
On top of it all, both economists see emerging market growth trending downwards, as well as persistent inflation. These factors will deliver a one-two punch to corporate earnings, which have already been hobbled by softening consumption and investment, as well as soaring energy costs. The bottom line? With earnings likely to remain weak, there’s no light at the end of the tunnel.