WASHINGTON The United States is now in a recession, say economists at Morgan Stanley Dean Witter & Co., and they see a 45% chance this deterioration will lead to a global recession.
In a message to clients Monday, Morgan Stanley chief economist Stephen Roach and the firms chief U.S. economist, Richard Berner, said gross domestic product will contract by 1.25% at an annual rate in the first half. For the full year, they said, the U.S. economy will grow 1.1%, down from their previous forecast of 2.5%.
Separately, Jack Guynn, president of the Federal Reserve Bank of Atlanta, predicted that the U.S. economy, though slowing, would grow 3% this year, with no large increases in unemployment or inflation. Mr. Guynns comments suggested that he favors further rate cuts to keep the economy from falling into a recession and that he sees the slowdown as a much-needed breather.
Slower growth isnt the same thing as not-growth, Mr. Guynn said in a speech to the Rotary Club of Atlanta. The U.S. economy remains the envy of the world, and everything that brought us here remains: low inflation, low unemployment, strong income growth, innovative businesses, and a sound financial system.
The Morgan Stanley economists took a more bearish view of the near future. Though their projected first-half contraction would be the mildest recession in U.S. history, the risk is that it will be deeper and longer than most, Mr. Roach told clients. Economists estimate that the U.S. economy probably grew more than 4% last year, the fourth straight year with growth at that pace or faster.
Growth slowed to a 2.2% annual rate in the third quarter, from a 5.6% pace in the second quarter. The latest forecast from economists is for a 2.7% growth rate in the fourth quarter. Most economists have forecast 2.5% growth in the first half.
Weakness in the United States will affect other economies, Mr. Roach and Mr. Berner said. For this reason they slashed their estimate for global growth in 2001 to 2.9% from 3.5%, which they said is the largest cut they have ever made in their global growth forecast.
The global economy has essentially turned on a dime, Mr. Roach said. Its time to make it official. The downside risks we have been warning of over the past several months are now coming to pass.