Recession Naysayers Hold Out

'Recession, what recession?', a determined group of observers exclaim.
Publish date:

Taking a contrarian view can be a grizzly experience.

It is for MKM Partners' economist Michael Darda, who believes all the recent hype in the markets about a recession is overblown. Darda, a frequent business television guest, appeared on


Jan. 2 sporting a new beard. Darda told

that he will not shave the beard "until the recession talk ends or housing recovers, whichever comes first."

Darda is a member of a small and increasingly frustrated crew of economists and market strategists who refuse to jump onto the recession bandwagon, despite its increasing popularity.

Since 2008 began, market participants have become ever more pessimistic about prospects for the U.S. economy to pull out of the current housing and financial crisis without contracting. The housing market continues to decline as borrowers face more mortgage-rate resets and as bad loans mount on lenders' and banks' balance sheets.

Michael Darda

Credit: CNBC

The glum sentiment intensified as economic reports last week showed that the woes of housing and mortgage-backed securities are spilling over into the broader economy. The manufacturing sector is declining, and unemployment is rising at a rapid clip. Also, warnings of layoffs swirled at Wall Street firms such as

Merrill Lynch




(C) - Get Report

, and oil surged to $100 per barrel.

The combination made for a gloomy start to 2008. Stocks fell in the first week of the year, as investors fled to the safe haven of Treasury bonds, and market participants bet that the

Federal Reserve

would take more action to cut interest rates.

But the gang of optimists say a few negative data points do not a recession make. And they're rather used to swimming against the negativity tide.

"Fears of recession are running rampant, but we think there has been an overreaction to the recent data," writes Darda. As for recent data that swayed many toward the recession camp, Darda notes that the Institute for Supply Management's report last week of a contraction in the manufacturing space with a reading below 50 at 47.7 is consistent with positive growth of 1.8%.

He also adds that the same data point has been as bad or worse at least four times in the past 12 years without preceding a recession. During the past two recessions, the ISM averaged below 45 as well, he adds.

First Trust Advisors' chief economist Brian Wesbury believes the economy will skirt recession because retail sales and consumer spending held up in the fourth quarter more than the economic bears had expected.

In a note Monday, he points out that November retail sales were strong and that fourth-quarter consumer spending is expected to show a 3% jump, adjusted for inflation.

December's consumer behavior is thus far "still OK," he writes, adding that car and truck sales were up in December and that chain-store sales have not slumped dramatically.

Wesbury also reminds clients that while December's 18,000 new jobs and unemployment rate jump to 5% from 4.7% were disappointing, it could well be subject to revision. August's initial report of 4,000 jobs lost in the month opened the door to the


50-basis-point rate cut in early September, but the jobs number was subsequently revised to an addition of 93,000 jobs in the month.

"We remain confident that neither a recession, nor any significant consumer slowdown, is in the cards," writes Wesbury. "The Fed is not tight, tax rates are still low, productivity is still strong, wages, incomes, and profit margins are still robust, and after revisions, the U.S. economy has proven its resilience time and time again."

Wells Capital Management's chief investment strategist James Paulsen agrees that the consumer is once again underestimated, despite the continued collapse in home prices.

"In this decade, there has been virtually no correlation" between housing and spending, writes Paulsen. He believes that "the outcome of the housing crisis will be determined by jobs," adding that while job creation is slowing, "it does not yet seem to be collapsing." He posits that December's economic activity may have been depressed due to weather. The Labor Department reported that the number of people not at work due to extreme weather in December was 60,000 above average.

As for the rash of negativity on Wall Street, "there've been a lot of doubters throughout this recovery," says Paulsen. "For the past six years, the recovery's supposed to have died."

Paulson adds that even last week's negative jobs and ISM manufacturing reports were not the only data in the game. The pessimism eclipsed what he called a "pretty good set of information" that offset the negative news. Namely, December's report of construction activity jumped for the second month in a row, on the basis of a 2.5% increase in commercial construction. The jump belies the bearish notion that commercial real estate would follow residential into decline, says Paulsen.

Likewise, the service sector is still expanding, and at a better-than expected pace in December, according to the Institute for Supply Management's report on Thursday.

Lehman Brothers' chief economist Ethan Harris finds himself frequently fielding the question from clients, "So why aren't you forecasting a recession?" His list of 10 reasons published Friday includes the economy's overarching strength over the past two decades, low inflation, high odds of a housing bailout, a conservative and shrewd corporate sector, the weak dollar aiding exports, conservative stock market valuations and the lack, thus far, of "a final unpredictable blow."

Darda says he is not under pressure from clients or anyone else to don the recession mantle, though there are probably a few who wish he'd shave.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


to send her an email.