Morgan Stanley is now Forecasting a Recession in 2008

Another of the big investment banks is forecasting a mild recession in 2008. Text in bold is my emphasis. From the Real Time Economics portion of the WSJ online:

Morgan Stanley’s economists are the latest to forecast a recession in the coming year.
In a research note today, chief economists Richard Berner and David Greenlaw say tightening financial conditions, coming weakness in business capital spending and slowing global growth “have tipped the balance.” They say a “mild recession” is now likely, with domestic demand contracting by an average annualized rate of 1% in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings contracting by 5% to 10%.

“Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth,” the economists write. “But the time for incremental changes is over.”

Most economists would agree with their first risk factor: further weakening in housing and consumer spending due to the rising cost and falling availability of credit. The Morgan Stanley economists also expect a 1.7% contraction in real capital spending by businesses over the four quarters of next year. And while growth abroad remains strong, they say, slowdowns in Europe and Japan are undermining that. Their forecast is for global growth to slip to 4.3% in 2008 from 5% this year, though “the risks like south of that still-hearty pace” and translate into downside risks to growth in U.S. exports.

They’re expecting the Federal Reserve to cut interest rates by a quarter percentage point Tuesday and at least three-quarters of a point more over the next seven to nine months as insurance against even more weakness. “One risk is that both our outlook and the Fed’s are too optimistic, because they pay too much attention to the economic resilience of the past, and not enough to the future effects of financial and economic headwinds and the dynamics of the downturn,” the Morgan Stanley economists say. “A contrasting risk is that we’re swayed by Wall Street pessimism and that things may be better on Main Street. In our view, downside risks still dominate.”