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Economists Raise the Odds of a Recession to 49%

Bernanke's Ratings
Slip, Despite Effort
To Reignite Growth
February 6, 2008; Page A4

Economists in the latest Wall Street Journal forecasting survey gave Federal Reserve Chairman Ben Bernanke the lowest grade of his two-year tenure -- 75 out of 100 points -- and said it was increasingly likely the U.S. economy will tumble into a recession.

See and download forecasts for growth, inflation, housing and more. Plus, views on fiscal stimulus, ranking presidential candidates and more. Survey conducted Jan. 31 – Feb. 4.

On average, the survey's 52 respondents put the odds of a recession at 49%, up from 40% in the January survey and 23% in June. Moreover, if a recession does materialize, they gave 39% odds that it will be worse than the past two recessions.

To try to stave off a recession, the Fed has been cutting rates aggressively, lowering the target for its benchmark federal-funds rate, at which banks lend to each other overnight, by 1.25 percentage points since mid-January. The economists expect a further half-point cut in that rate, now 3%, by the end of June.

Despite his efforts, Mr. Bernanke drew increasing criticism, with economists faulting him for what they said was his poor management of Fed communications and being overly attentive to fluctuations in the stock market. The overall grade they gave Mr. Bernanke dropped below 80 for the first time.

The Fed has offered "too little too late on cuts, and has been lax on supervision and regulation," said Allen Sinai of Decision Economics.

But 43% of the participants said the Fed was too quick with its surprise 0.75-percentage-point cut on Jan. 22, a response to falling stock prices. "They looked unsteady," said Dana Johnson of Comerica Bank.

On average, the economists, who were surveyed between Jan. 31 and Feb. 4, predicted the nation's gross domestic product -- or total output of goods and services -- will expand at a 0.6% annual rate in the first three months of this year; that is down from the 1.2% pace predicted in the previous survey. In fact, they lowered their growth estimates for every quarter of 2008. The economy grew a slim 0.6% in the fourth quarter of 2007, a sharp deceleration from the third quarter's 4.9%.

"While it is a close call, we do not think the economy will fall into a recession," wrote Ethan Harris of Lehman Brothers, who was the top-ranked forecaster for 2007. "Aggressive Fed easing and fiscal stimulus should support growth."

If there is a downturn, the economists said, there is a better than 1-in-3 chance it will be worse than the one in 2001 or the one that ended in early 1991. "The fact that housing is involved and credit creation could be materially impaired for some time increases the chances this could be a more serious recession," said Scott Anderson of Wells Fargo & Co.


The economists expressed lukewarm support for the economic-stimulus package being debated in Congress. The majority expects it to have a welcome but moderate effect on the economy. Almost a quarter said tax rebates would have a significant effect on consumer spending, while just 7% expected investment tax credits to have a major impact on business spending.

The economists expect home prices, as measured by the Office of Federal Housing Enterprise Oversight, to fall 4.5% this year. Pressure also looms from a weakening labor market. In the wake of January's 17,000 drop in nonfarm employment, the respondents expect the economy to add fewer than 50,000 jobs a month over the next year, with the unemployment rate rising to 5.4% by December from January's 4.9%.

The Wall Street Journal surveys a group of 55 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see:

Among other survey findings:

 Mr. Bernanke wasn't the only central banker who fell in economists' estimation. European Central Bank President Jean-Claude Trichet's grade dropped to a 75 from a 90 in October, while Bank of England Gov. Mervyn King scored a 70, down from a 78 in October. Treasury Secretary Henry Paulson, meanwhile, got a 74, down from an 87 in October 2006, the last time the question was put to the economists.
 Some 68% said the credit crisis and related market turmoil was about half over, but the majority (60%) has been saying that since the question was first asked in September.

Write to Phil Izzo at

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