FBR Researchers Offer Bearish Take on Economy

Steve East, an economist at Arlington investment bank Friedman, Billings, Ramsey Group, says economists usually don't see a recession coming. But he says he sees one looming on the horizon.

"I think that if you look at the lessons of history, combined with what's going on right now, you would come to the conclusion that the probability that sometime over the next year a recession starts is probably over 50 percent," East said.

Last week, East and a colleague, Samir Upadhyay, released a research update that put the odds of recession at 60 percent. A survey of economists released last week by the Wall Street Journal put the odds at 36 percent.

The FBR report outlined four reasons for a likely recession.

First, long term interest rates have now dipped below short term interest rates, an unusual phenomenon in which people expect a greater return on investment in the short term rather than the long term. Since 1962, the so-called "inverted yield curve" has occured seven times. Only once in 1965-1966, a recession didn't follow.

Second, employment is decreasing, as measured by a household survey. The survey has shown job losses nine times since 1953, each preceding a recession. (Another measure, of nonfarm payrolls, has shown growth.)

Third, according to the research, Americans are unlikely to have their faith in the credit markets restored after the current credit crunch. Over the past seven years, Americans' reliance on credit has increased substantially, contributing to the "mild nature of the 2001 recession and to the economic growth during the subsequent economic expansion."

Finally, the paper concludes that home prices will continue to fall, perhaps by 12.6 percent over the next two years. The paper says that would be an unprecedented decline in the post World War II period, one that could have a significant negative impact on spending.

That said, the paper said a recession is not inevitable. Propping up the U.S. economy, according to the report? A steady growth in exports.
-- Zachary A. Goldfarb

By Mike Shepard  |  September 14, 2007; 6:57 PM ET  | Category:  FBR , Finance
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