E C O N O M I C S &M A R K E TA N A L Y S I SEconomicsJanuary...

E C O N O M I C S &
M A R K E T
A N A L Y S I S
Economics
January 18, 2008
Forecast Update: Call It Recession
➤ The U.S. economy seems likely to contract as 2008
begins, weighed down by tightening financial
conditions, energy cost burdens, and fundamental
weakness spreading beyond housing.
➤ We�ve cut our full year 2008 GDP outlook to 1.2% on a
4Q/4Q basis from 2.4% previously. The unemployment
rate should climb to 6%. Academic definitions aside,
we�ll call that recession. �Mild but prolonged� seems
more likely than �quick and deep.�
➤ While financial market weakness appears anticipatory
this time, financial conditions might provide an �open
ended� test of the U.S. economy�s continued resilience.
➤ Driven by a record drop in Financial sector EPS in 4Q,
2007, S&P 500 operating EPS fell 1% in 2007. We
expect a 1.5% drop in 2008. The 2008 estimate has
been cut from $96.50 to $86.00.
➤ Declines in earnings in 2007 were confined to
Consumer Discretionary and Financials (housing).
Declines will be broader based in 2008, though S&P
500 EPS should outperform (national) domestic profits.
➤ There are four reasons why large cap index EPS are
unlikely to fall sharply in 2008: 1) Decelerating, but
positive, foreign earnings; 2) Repatriation at favorable
exchange rates; 3) Significantly higher energy sector
EPS; and 4) The massive financial sector write-offs
should hurt 2007 EPS far more than 2008.