Thursday, July 22, 2010

Recessions in U.S. May Be More Frequent and Severe, Soss Says

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By Courtney Schlisserman

July 21 (Bloomberg) -- The fallout from the worst recession since the 1930s means U.S. contractions will be more frequent and severe, according to Neal Soss, chief economist at Credit Suisse in New York.

“The era of rare, brief and mild recessions from the early ’80s to the mid-2000s is over,” Soss said today on a conference call.

Increased regulation and a drive to hold less risky assets such as cash following the financial meltdown will eliminate some of the instruments that helped smooth out economic growth over the past two decades, particularly in the U.S., Soss said. The current slowdown, while unlikely to result in a renewed downturn, will seem worse because the rebound has been weak.

“The starting point of high unemployment, high vacancies and low capacity utilization means any slowing in growth is going to feel dangerously close to a renewed recession,” Soss said. “It’s not the same thing, but it’s going to feel like it.”

President Barack Obama today signed the most sweeping set of financial rules since the Great Depression, capping a yearlong legislative struggle to draft and pass the measure spurred by the 2008 financial crisis that triggered the collapse of Lehman Brothers Holdings Inc. and dragged down Wall Street and the U.S. economy.

The moderation in economic cycles over the past two decades was associated with financial deregulation and innovation, Soss said. “Voluntary financial prudence and restrictive government regulation render that mechanism unavailable,” he said.

Less Growth

The U.S. and China are among countries now in a period of “decelerating growth,” Soss said. He “emphatically” does not believe the world’s largest economy will “double-dip” because gains in business investment on equipment and software will be enough to avoid a renewed recession.

Credit Suisse’s model says there is zero chance of another contraction in the next six months.

While companies appear to be willing to stop liquidating inventories and to stop firing employees, they also want to hold on to cash, which means they won’t accelerate hiring and start rebuilding stockpiles, Soss said.

The government is scheduled to release its first estimate for second-quarter U.S. growth next week. Recent reports show manufacturing, a key driver of the recovery, slowed in June and employers hired fewer workers than projected by economists surveyed by Bloomberg News.

The growth slowdown indicates the U.S. has entered a “problematic stage for equities,” Credit Suisse Chief Global Equity Strategist Andrew Garthwaite said on the call. Even so, the firm is maintaining its forecast shares will increase by 10 percent to 15 percent over the next six to 12 months.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net