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Monday, April 09, 2007

Morgan Stanley: The Employment Conundrum

by Calculated Risk on 4/09/2007 01:07:00 PM

Richard Berner and David Greenlaw at Morgan Stanley write: The Employment Conundrum

Once again, we’ve marked down our forecast for growth, reflecting still-higher energy prices, a deeper housing recession, and additional weakness in capital spending. Over the first three quarters of 2007, we now see growth at a 1.8% annual rate compared with 2.6% in our March update; that’s a full percentage point below our prognosis of two months ago. With growth below trend and operating leverage fading, margins are flattening and earnings growth will be weaker. And once again, reflecting higher prices for energy, food, imports, and medical care, we’ve marked up our outlook for headline and to some extent core inflation.
We don’t pretend to have all the answers, but here are our guesses: Job gains have already slowed, and payrolls will continue to decelerate, but not fast enough to undermine consumer wherewithal. The housing recession is far from over, but strong global growth likely will sustain both output and employment. The productivity slowdown is cyclical, but the trend may also have slipped. We still think core inflation has peaked, but inflation risks are rising again. And margin compression implies that profits likely will stall in 2007. That combination will likely leave the Fed on hold and steepen the yield curve. Importantly, however, neither those conclusions nor the weaker baseline presented here imply serious trouble for the economy.
See the above link for a more detailed analysis.

Here come the downward revisions, but Morgan Stanley still doesn't see a recession in 2007.

UPDATE: The online post shows a forecast of real GDP at 2.0% in 2007, and 3.9% in 2008. The 3.9% is a typo, their actual forecast is for 2.9% in 2008.