Mental Recession? Maybe. Economic Recession? No

One the smartest guys I know is Bruce Kasman over at JPMorgan, and he still doesn't think the economy is going to fall into recession, much a less a severe, 1982-style downturn. (Neither, by the way, does the Fed.) Rather, he sees the economy muddling along with 1 percent GDP growth in the second half. Here are his three reasons:

1) Profit margins at nonfinancial companies remain healthy. "This is a testament to the fact that firms have produced strong productivity gains—estimated to have risen at a 2.5% pace in 1H08."

2) Trade remains strong. "This is related to the decline in the dollar and the composition of US exports which is concentrated in agricultural products, industrial supplies, and capital equipment—items that remain in demand by rapidly growing emerging market economies."

3) Businesses will have to rebuild their inventories. "Apparently, retailers and manufacturers are using the lift to demand from rebate spending and strong exports in 2Q08—in which final sales grew at a faster than 3% clip—to clear their shelves. In addition, the agricultural sector is experiencing a forced inventory drawdown due to floods and bad weather conditions. This destocking is holding back our estimate of 2Q08 growth to 2.2%. But it will add significantly to growth in the coming quarters. It should be noted that only twice in the last three decades—at the end of 2001 and 1982—did firms destock at the pace seen in 1H08. In both these previous cases, a stabilization in stockbuilding contributed more than 1.5 percentage points to growth over the following two quarters."