Prospects for a Growth Recession

CHICAGO, June 6, 2008 —"It is sometimes hard to discern whether the glass is half empty or half full when it comes to the current state of the economy. Optimists cite incoming data, which shows that the U.S. continued to skirt a statistical recession in the first quarter. Pessimists, on the other hand, fear that much of the weakness associated with higher food and energy prices, and the drag on wealth associated with falling home prices, is still ahead of us," says Diane Swonk, chief economist of Mesirow Financial, in her mid-year economic review edition of Themes on the Economy.

"The economy is not expected to grow fast enough to absorb the influx of new workers to the labor force, and the unemployment rate is expected to continue to rise. This is closer to what economists term a "growth recession" than a true expansion—even though growth remains positive," notes Swonk.

In her June newsletter, Swonk takes a detailed look at the forecast for growth in the second half of 2008 and first half of 2009, including:

• Real GDP Growth. After picking up a bit in the wake of easier monetary and fiscal policy, the economy is expected to come to a slow again at the turn of the year:
• Consumer spending. Tax rebates and increased cash flow (created by lower mortgage resets) is expected to provide a lift for consumer spending in the second and third quarters, but much of that spending is now expected to be spent on staples instead of discretionary purchases.
• Business investment is expected to rebound slightly in response to a pick up in investment in the oil, agriculture and export sectors.
• Inventories are expected to rebuild after being drawn down to unusually low levels, which should provide an extra lift for manufacturing activity.
• Government spending is expected to remain relatively stable, with increases in federal spending offsetting a slowdown in spending at the state and local level.
• The trade deficit is expected to be the bright spot in an otherwise dull outlook for the U.S. economy. Much of the rise in exports associated with the weak dollar is still ahead of us, as it typically takes as much as two years for the full effects of a shift in the dollar to work its way through the economy.
• Inflation. Both the overall and core measures of price inflation are expected to abate, but remain well above the Fed's "comfort zone."
• The Fed hesitantly abandons its concerns on growth and financial market stability for inflation
• Treasury yields are expected to continue to rise, and the spread between corporate yields is expected to narrow as credit markets stabilize.
• Profit growth. Cost-cutting and higher productivity growths are expected to boost corporate profits in late 2008 and early 2009.

"The economy is expected to continue skirting a statistical recession, but that doesn't mean times won't be tough for a large cross section of the population and businesses. Any gains that we do see in response to tax rebates and monetary stimulus over the summer, in particular, are not expected to do much to boost consumer or business confidence ahead of November elections," concludes Swonk.

The June issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with $32.2 billion in assets under management and more than 1,100 employees in 30 locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals and was named one of Chicago's Best Places to Work by Crain's Chicago Business in 2008. For the fiscal year ended March 31, 2008, the firm posted $490 million in revenue (unaudited), with more than $245 million in capital. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.

For more information, contact: Diane Swonk, Mesirow Financial, 312.595.7122, or Olga Camargo, Mesirow Financial, 312.595.7128.

 

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