(cache) Odds of Recession Seen Rising

Economists surveyed by The Wall Street Journal see increasing odds of a recession this year along with mounting inflationary pressures, an uncomfortable mix that could play a role in shaping the 2008 presidential campaign and complicate life for the Federal Reserve.

In the latest monthly survey, economists put the chance of recession at 42%, up from 38% in December and 23% just six months ago. On average, the 54 forecasters who participated see the economy expanding at less than a 2% annual rate in the first and second quarters. Last month's survey estimated 2007 growth at 2.5%.

CHARTS AND FULL RESULTS

See and download forecasts for growth, inflation, housing and more. Plus, grading Bernanke, Bush approval rating and more. Survey conducted Jan. 4-8.

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"The U.S. economy in 2008 will be like a cat on a hot tin roof that has already used up eight of its nine lives," said Stuart G. Hoffman of PNC Financial Services Group Inc. Amid rising unemployment, higher oil prices and troubles in the credit and housing markets, "you worry about the cumulative effect that it all has on psychology," he said.

On the political front, most of the respondents expect a Democrat to be elected president this year, although they personally prefer a Republican. Some 56% disapprove of President Bush's handling of the economy, about the same as the 59% of the public who disapproved in a recent Wall Street Journal/NBC News poll.

Three economists forecast a recession in 2008. Setting off the alarm bells was last month's jump in the nation's unemployment rate to 5%. "Historically, this has invariably been associated with recession, typically starting immediately and almost always within three months," Goldman Sachs Group Inc. said in a research note.

The economists expect the unemployment rate to be 5.1% by June and 5.2% by December; both predictions exceeded earlier forecasts. They also expect the economy to add just 74,000 jobs a month during the next year, the fewest since the question was added to the survey in 2004.

ABOUT THE SURVEY

The Wall Street Journal surveys a group of 55 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, monthly updates are conducted for the most closely watched forecasts. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists.

Price pressures are expected to increase this year. The average forecast for the year-to-year rise in the consumer-price index was 2.7% by June, up from 2.5% in the prior survey. That would make the Fed's job harder. Consumer prices were 4.3% higher in November 2007 compared with a year earlier, a figure pushed up by a surge in oil prices.

While the economists predicted the Fed's preferred measure of inflation -- the personal consumption expenditures index, excluding food and energy -- will rise just 2% in 2008, in line with the central bank's own predictions and at the top end of its comfort zone, higher oil prices are expected to drive inflation at least in the near term.

Though the Fed will worry about rising prices, economists still expect the central bank to cut interest rates by at least another half percentage point over the first half of the year. Indeed, in a speech yesterday, Fed Chairman Ben Bernanke, opened the door to a "substantive" rate cut, saying the "outlook for real activity in 2008 has worsened." But Mr. Bernanke said he didn't expect a recession.

The continued uncertainties and the Fed's response to them so far appear to have taken some of the shine off Mr. Bernanke. When asked to grade the Fed chief, economists on average gave the chairman a score of 80 out of 100, the lowest mark of his tenure.

"If he were an Olympic skater, his technical score would be close to a 9 or 9.5, because we have gotten a lot of stimulus in monetary policy in recent months. His artistic score, or the execution of those moves, however, are closer to a 3.5 or a 4, which would knock him out of medal territory. There is no performance without passion and conviction," said Diane Swonk of Mesirow Financial.

With the chance of recession rising, the economy is overtaking Iraq as voters' top concern, polls show. Michigan, where the Republican race heads next, has been hit hard by foreclosures and a loss of manufacturing jobs.

When asked whom they expect to win the presidency, 63% of the economists in the survey picked a Democrat -- with their choice split between Illinois Sen. Barack Obama, with 33% of the total, and New York Sen. Hillary Clinton, with 30%. (The survey was conducted before Mrs. Clinton's win in New Hampshire.) Republican Sen. John McCain was the pick of 30% of economists, with two other Republicans, former New York Mayor Rudy Giuliani and former Arkansas Gov. Mike Huckabee, each getting 3%.

However, when asked their personal preference, the economists favored Republicans. Sen. McCain led the field with 39% of the forecasters' votes, compared with 11% for Mr. Giuliani and 7% for former Massachusetts Gov. Mitt Romney. Among Democrats, Sen. Obama edged Sen. Clinton, 14% to 11%, while former North Carolina Sen. John Edwards took 4%.

Some 56% of the economists disapproved of President Bush's stewardship of the economy, while 44% approved. That is especially startling considering 59% of the economists said the stock market performs better under Republican presidents, compared with 28% who said it favored Democrats. Most economists who disapproved of Mr. Bush cited an increase in government spending. Many praised the president's tax cuts.

However, the economists expressed doubt the tax cuts, which are due to expire at the end of 2010, will be extended. The top marginal tax is 35% on ordinary income and 15% for dividends. When asked what those rates would be in 2011, the economists, on average, expected a 38% tax on ordinary income and a 22% tax on dividends. "The Bush tax cuts will leave with Bush," said Neal Soss at Credit Suisse Group.

Though the slowdown will increase the focus on the economy in the run-up to the November election, analysts said it will have recovered to some extent by the time the next president takes office. "Length of recession doesn't vary very much: about three quarters and that's it," said David Wyss of Standard & Poor's, who isn't predicting a recession.

President Bush is considering an economic-stimulus package, but it isn't clear what kind of measure might pass Congress.

Separately, a global financial group predicted yesterday that global growth will slow this year, largely due to the crisis in the U.S. for subprime loans.

The Institute of International Finance, which has 370 member organizations, said the turmoil has damaged banks in Europe and worsened "fragile confidence" in Japan. It expects the U.S. to avoid a recession -- but predicts growth will be a relatively weak 2.3% this year. The group expects Europe's economy to expand 2.1% and Japan 1.3%.

Growth in developing and emerging markets, meanwhile, will slow from its feverish pace but remain quite strong, the group predicted, adding that "among concerns not as yet widely discussed are house prices in many [developing] countries that are higher than those in the United States."

--Kelly Evans contributed to this article.