Morgan Stanley has became the first major Wall Street firm to predict that the U.S. economy will fall into recession. In an article entitled "Recession Coming," Morgan Stanley economists Richard Berner and David Greenlaw forecast that the U.S. economy will suffer a mild recession in 2008:
We’re changing our calls for US growth and monetary policy. Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth. But the time for incremental changes is over. A mild recession is now likely: We expect domestic demand to contract by an average 1% annualized 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 to contract by 5-10% over that longer period. Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth — for us, long the key bulwark against a downturn — is slowing.
Berner and Greenlaw likewise see the potential for a "perfect storm" for consumers brought on by the continuing housing downturn (they predict a 10% decline in home prices next year), a weakening job market, and higher energy and food costs. To avoid an even sharper downturn, they expect the Federal Reserve to cut interest rates by 100 basis points over the next seven to nine months, moves they believe will help keep the recession short and mild.
To date, most Wall Street economists have stopped short of predicting a recession. If the Morgan Stanley forecast comes true, it would almost certainly accelerate the predicted rise in corporate debt defaults, especially on high-yield debt. That would very likely bring about an even bigger increase in Chapter 11 bankruptcy filings than has already been predicted.