U.S. lengthier recession

Indeed, in their year-ahead predictions back in December and January, most economists expected U.S. growth would be weak in the first part of 2008 and then rebound (some even expected the Fed Funds target rate – currently 2% - would be back at 4.5% by year-end).

In today’s paper, we explain how that scenario has changed – thanks to cash-strapped consumers and a slowing global economy, many now say the U.S. economy could contract during the second half of this year.
Such a prospect, coupled with a quarter of GDP decline at the end of 2007 already on the books, raises the likelihood that the U.S. will experience a lengthier recession now than the previous two, in 2001 and 1990-91, that lasted just eight months each.
So how, especially with oil prices now well below their record highs and stock markets soaring on Friday, is it that the outlook is now so precarious?

There are four main components of U.S. economic growth, as measured by GDP: consumption (the largest), investment, government spending, and net exports. Two of those components – consumption and net exports – look especially weak going into the second half of this year.
Consumption is poised for its first quarterly contraction since the 1990-91 recession in the coming months, while export growth is losing steam as economic weakness is spreading in Europe, the U.K., Japan, and elsewhere. Prospects for investment and government spending, meanwhile, are shaky at best.
“The global economic slowdown has broadened and intensified,” wrote J.P. Morgan economists Friday in a note to clients, adding that data released this week “should confirm that that Euro area and Japan contracted last quarter….Emerging market economies are also cooling materially.”
Slowing demand for U.S. exports, which have been a crucial source of strength for the economy over the last several quarters, could mean trouble ahead for many companies who have relied on foreign demand as U.S. growth slowed. “The recent downshift has proved more powerful than expected,” the J.P. Morgan team cautioned.