Fears of a US recession are overdone, argues BMO Nesbitt Burns Inc. in a research note.

BMO Nesbitt notes that the credit rating agency, Dominion Bond Rating Service, released a report detailing its view that the inverted yield curve in the U.S.— “signals a significant risk that the U.S. economy will fall into recession over the next 12 months.” It says that DBRS’ model predicts there is more than a 30% chance that the U.S. economy will be in recession by November 2007.

However, it points out that, “the difference between this yield-curve inversion and earlier ones is that the Fed has not slammed on the brakes this cycle, driving up short-term interest rates to levels sufficient to snuff out economic growth. Moreover, 10-year yields of 4.5% are just not sufficient to stop businesses from investing in non-residential construction or software and equipment.”

“Labour markets are so tight that [Fed chief Ben] Bernanke is worried about the potential for upward pressure on wages and prices. Compensation growth and the fall in gasoline prices have fuelled continued consumption growth and the U.S. net-export position is improving, which will be augmented by the weakness in the dollar,” it adds.

“To be sure, housing and autos are very weak, but that is not enough to tip the economy into recession,” BMO Nesbitt maintains. “Indeed, Bernanke pointed out in his speech yesterday that core inflation remains ‘uncomfortably high’, reducing the likelihood of easing in monetary policy anytime soon.”

“The Fed remains more concerned about inflation than recession,” it maintains. “Bernanke has essentially blamed long-term core inflation on three factors: high costs for energy and raw materials, high shelter costs and higher capacity utilization. But energy and shelter costs will likely detract from inflation in the coming year and a modest slowdown in economic activity could well reduce the pressure on capacity. The Fed will be watching labour costs and so will the markets.” It concludes that recession worries “appear to be overplayed.”