Morgan Stanley has forecasted a downturn in the American economy in a report titled “Recession Coming,” released on Monday.

“We’re changing our calls for U.S. growth and monetary policy,” the report begins.

Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth. But the time for incremental changes is over. A mild recession is now likely: We expect domestic demand to contract by an average 1 percent annualized in each of the next three quarters, no growth in overall gdp for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10 percent over that longer period.

The report points to tightening financial conditions, particularly in the housing market and auto industry, as one major reason for the coming recession.

Credit availability, moreover, likely has dwindled beyond where the Fed’s November Senior Loan Officer survey left it. As delinquencies and defaults soar, lenders and investors are tightening credit for commercial, credit card and auto lending, as well as for mortgage borrowers. Delinquency rates on all 1-to-4-unit residential mortgages jumped to a 19-year high of 5.59 percent in the third quarter, and the foreclosure start rate rose to a record 1.69 percent. With home prices just now falling by some measures, credit tightening, and resets looming, more foreclosures are likely.

Morgan Stanley continues,

While investors are expecting that an ongoing housing downturn and threats to consumers already menace growth, it’s worth noting some lesser-plumbed features of the domestic scene. First, we think tighter lending standards will depress housing demand further. But even if demand stabilizes, so large is the supply-demand mismatch that builders must slash single-family housing starts by 40 percent from current levels to eliminate the inventory of unsold homes. As a result, we think overall housing starts will run below 1 million units in each of the next two years—a level not seen in the history of the modern data since 1959. The housing downturn will likely subtract 0.9 percent from growth in the next four quarters, and the housing recovery in 2009 will hardly merit the name.

Of the auto industry, the report says,

[S]lipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles. Auto analyst Jonathan Steinmetz thinks that Detroit is switching from “putting money on the hood” to accepting lower sales and making production cuts.

The report also points to “weakness in business capital spending” and slowing growth in the European and Japanese financial sectors as the two other major reasons for the slowdown.

The Telegraph reports, “Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia and Europe will come to the rescue as America slows.”

Morgan Stanley and banks in general often tend to be optimistic in their forecasting, since such reports affect investor and consumer confidence. But this splash of cold water from Wall Street comes from Morgan Stanley’s chief U.S. economist, Dick Berner, the company’s “resident bull.” This indicates that even the most hopeful of analysts are getting ready for a precipitous plunge in the American economy.

For the average American, these developments mean that consumers could be facing what Morgan Stanley terms “a perfect storm.”

For additional Trumpet forecasting on this subject read, “Greenspan’s Interest Rate Problem,” “The Housing Bubble—Everybody’s Talking,” and “The Next Market to Crash.”