US economic stimulus wont prevent recession

Jan 25 | Updated: Jan 26 2008, 05:49am hrs
The $150 billion economic stimulus plan sought by the Bush administration isnt enough to spare the US from a possible recession, according to analysts at Lehman Brothers Holdings Inc.

The US offered a similar package to consumers in 2001 and that didnt prevent a recession, analysts led by Hong Kong-based Pradeep Mohinani wrote in a research report on Friday. A much larger amount will likely need to be focused on, and the amounts discussed in the market are as high as $500 billion, they said.

Lehmans economists cut their 2008 growth forecast for the US economy to 1.6% from 2.1%, with first-quarter expansion projected at 0.5%, rising to 0.8% in the second quarter.

The New-York-based investment bank remains pessimistic about the credit market outlook in the next one to two months given potentially more news about bank writedowns and bond sales.

Although the current rate cuts have been some of the most aggressive in the past 40 years, it may be a while before we see a consistent compression in the spreads, the analysts wrote.

Banks need to start lending to prevent a further slowdown, in the economy or the Federal Reserves rate cut will lose its efficacy, Lehman analysts said.

As US and Asian economies are trending down, most metal and energy prices also seem to be running out of steam, Lehman said. Crude oil fell almost 10% from its peak on January 2, according to the New York Mercantile Exchange. Copper is down 15% from October, according to London Metal Exchange. Zinc in Shanghai for April delivery slid 41% since May.

This would hurt debt of companies such as Vedanta Resources Plc, according to the research report. Lehman doesn't expect weakening commodity prices to put pressure on Vedanta's credit rating of Ba1, one level below investment grade, from Moody's Investors Service.