NEW YORK (AFX) - The U.S. economy has now slipped into recession, Bear Stearns economists said, adding they have changed their assessment to reflect a number of poor U.S. data reports which seal expectations of a 50-basis point rate cut at next Tuesday's Federal Open Markets Committee (FOMC) meeting.
"The shakeout of jobs over the coming months is likely to be more severe than we had previously imagined, and under these circumstances we can no longer hold to the view that the economy will skirt a recession," Bear Stearns economists wrote in a research note. While declining inventories registered in the first quarter GDP report had originally generated optimism that a recession could be avoided, Bear Stearns concluded that the enormous job losses recorded in April and recent weekly jobless claims represent too large a risk to consumer spending to maintain that view.
"We do not see how consumer spending can continue to hold up in the face of a significant contraction in employment," the group said. The Labor Department announced last week that April non-farm payrolls dropped by 223,000, the largest fall since Feb 1991.
Weekly initial unemployment claims have also "deteriorated significantly," Bear Stearns noted, with claims now above 400,000 a week.
The investment bank now assesses a greater than 50 pct chance that the economy "has slipped" into recession, forecasting a contraction in GDP for both the second and third quarters.
"It is, therefore, as close to a certain call as there can be that the Fed will cut interest rates by a further 50 basis points at the May 15 policy meeting," Bear Stearns economists concluded.
The group also cut its forecast for the low mark in the FOMC's federal funds rate target, to 3.0 pct from 3.5 pct. The fed funds rate currently stands at 4.5 pct.