Rising Risks of Recession

How long have economists and strategists been referring to the U.S. economy as "Goldilocks" -- not too hot, not too cold? It seems like forever.

That scenario is about to end. I predict that the U.S. economy will experience a recession at some point between 2007 and 2009, and in anticipation of this, U.S. stocks are beginning a bear market that should continue right through the 2008 presidential election.

I define a recession as two consecutive quarters of negative GDP growth. The U.S. economy has not seen that since the fourth quarter of 1990, which had negative 3.0% GDP growth, and the first quarter of 1991, which had negative 2.0% growth. In 2000 and 2001, there were three quarters of negative GDP, but no two happened consecutively. I guess we could call that a Goldilocks "soft landing."

I hate to be an alarmist, but I don't believe that the economic drag from the housing and real estate markets can end without at least two quarters in a row of negative GDP growth, or worse. I wouldn't be surprised to see a year or two when annual GDP actually declines in current dollar terms. That has only happened in 1929 to 1933, 1945 to 1946 and 1948 to 1949, so most of us have not seen this in our lifetimes.

Subprime: Tip of the Iceberg

According to an Associated Press report, Karen Shaw Petrou, managing partner of Federal Financial Analytics, estimates that subprime mortgages total $1 trillion of the $8 trillion in U.S. home mortgages; that's not peanuts! According to the Center for Responsible Lending, as many as 2.2 million families could lose their homes in the coming years. Under the surface of the real estate iceberg that will sink the economy are construction loans on the books of the nation's banking system.

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At time of publication, Suttmeier had no positions in any of the stocks mentioned in this column.

Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.