Recession seen certain but not recovery's shape

NEW YORK (Reuters) - On Wall Street there is little doubt the U.S. economy is in recession, and analysts now are beginning to wonder, and worry, about the type of recovery that lies ahead.

Often, a simple letter of the alphabet is used to describe a recovery's shape. While economists are uncertain what the future may hold, few expect a sharp V-shaped recovery in which economic growth would bounce back quickly from a slump.

"Certainly no one has projected a V-shaped recovery," said Bernard Baumohl, managing director of the Economic Outlook Group. "The nature of the problems that we are facing are very serious and as a result this is not some garden variety recession that we are having."

Instead, analysts say a crumbling housing market, and persistent credit and liquidity problems in money markets, suggest the letters W, L or U are more likely to describe the shape of the path economic growth will likely follow.

"We're in recession right now and it's going to last significantly longer and probably get a lot deeper," said Brian Fabbri, managing director of economic research at BNP Paribas.

Fabbri warns that banks still need to unwind a lot of mortgage-related bets, which will likely keep credit conditions tight. "They are doing it in a recession and it's exacerbating the recession," he said.

RECESSION FIGHT

The warnings come against a backdrop of aggressive efforts in Washington to keep the economy afloat.

Since mid-September, the Federal Reserve has reduced its benchmark interest rate three full percentage points and policy-makers are expected to cut the Fed funds rate further at its meeting next week.

In addition, the central bank has provided billions of dollars in liquid funds to near-frozen markets and stepped in to prevent what would have been an unprecedented collapse of the investment bank Bear Stearns, which some believed could have driven the economy into a 1930s style depression.

Congress and the Bush administration also moved quickly to put in place an economic stimulus package that will put tax rebate checks in consumers hands to boost spending and likely will provide a boost to economic growth through at least the third quarter of 2008.

These efforts should cushion the blow as banks sell off or write down mortgage related assets and a rising number of homeowners brace for foreclosure, but many economists think more will need to be done and some think a second stimulus package may be needed next year to assure a more certain recovery.

"Clearly there is still risk in bank portfolios," said Fabbri. "Monetary policy has been diluted as we speak by tightening of credit lending standards."

RECESSION?

While Wall Street is convinced the economy entered recession late last year, the private-sector Business Cycle Dating Committee at the National Bureau of Economic Research, the accepted recession arbiter, has yet to make that call.

But panel members have become increasingly gloomy.

"With monthly GDP down sharply and three consecutive months of decline in payroll employment, there seems little doubt about a genuine decline (in economic activity), though nowhere near enough to call a recession soon," said Stanford University professor Robert Hall, who chairs the committee.

So far this year the economy has shed a quarter of a million jobs, far less than the 1 million to 2 million typically lost in a downturn, although economists warn the toll will mount in the months ahead.

"Things don't look good. I know the unemployment rate doesn't look that bad, but in my view that is because so many people have dropped out of the work force compared to the last cyclical peak in 2000," said Harvard University professor Jeffrey Frankel, another member of the NBER panel.

"A W-shaped recession is certainly a possibility," he said, alluding to the chance of a double-dip recession.

Michael Feroli, an economist at JPMorgan, thinks the stimulus plan now in place will help bridge the economy to a point where the Fed's interest rate reductions finally start making themselves felt.

But even he doesn't rule out the need for further action.

"We may need another boost," Feroli said. "It's getting better, but it's getting better pretty slowly."

Troubles in the housing and credit markets have already begun to spread more widely.

On Tuesday, the nation's largest health insurer, UnitedHealth Group, announced a lower-than-expected first quarter profit and slashed its outlook, saying a weak economy is causing customers to seek leaner benefits.

"If you take consumers and housing out of the equation, you effectively set aside 80 percent of the economy and that tells you this is going to be a very weak and difficult environment," said Baumohl.

(Reporting By Joanne Morrison; editing by Clive McKeef)