You Call This a Recession?

We would expect this to have a similar impact to the 2001 rebates, when about 60% of the money was spent within 60 days. We have toned down the expectations slightly here, on the assumption that spending may be deferred because some people will need the money to pay the mortgage. But insofar as that happens, it should help moderate the problems in the housing market, which also helps the economy. We think we are being conservative in this assumption. We see no evidence that people are less willing to spend than they were seven years ago; indeed the savings rate is much lower today than heading into the 2001 recession. We expect consumer spending to rise 2.1% in the second quarter and 4.1% in the third (in constant dollars); without the rebate, spending would have been nearly flat.

The impact of the business tax cuts is less clear, in part because the tax cuts themselves haven’t been fleshed out completely. We assume these will be accelerated depreciation, which actually gives a bigger "bang for the buck" than rebates, because the extra tax allowances provided for this year will be partially recouped in subsequent years.

THE ECONOMIC RESULT

Our forecast for 2008 now begins with a slightly negative first quarter, with the economy then bouncing higher in the second and third quarters (growth of 1.2% and 1.9%, respectively). We predict the fourth quarter to turn negative because the rebates will have already been spent by then. The business investment increases are not sufficient to offset the drop-off in consumer spending power, by our analysis.

As we previously noted, we expect the Fed to bring the federal funds rate down to 2.5% by the March meeting. Bond yields should gradually increase from their current level, as fear of a deep recession wanes, but we expect the 10-year yield to remain under 4% through yearend. S&P expects the S&P 500 to close 2008 at 1560.

Whether this will count as a recession depends on the decision of the National Bureau of Economic Research Business Cycle Dating committee. The period looks a lot like 2001, however, in which they did call it a recession. We expect the same for 2008.

— Senior Economist Beth Ann Bovino contributed to this report.

Wyss is chief economist for Standard & Poor's in New York .