The brain trust at Standard & Poor's has some dour news—the U.S. economic recession won't end in 2008.

"We are in a recession. It is a mild but long one," said David Weiss, chief economist, S&P. Weiss made his statement during his firm's conference call focused on the economic outlook for second half of the year.

Weiss stated the recession won't lift until early 2009 and predicted the Fed will hold interest rates stable until next year, citing the upcoming Presidential election and a need to reach the bottom of the recession in Q1 2009 as reasons for his prediction.

"But if financial markets remain locked up, housing continues to drop and oil is up to $150 a barrel instead of down to $110, then there is a risk of a deeper, longer recession," said Weiss. He gave it a 20% chance that the recession would be a deep one, "more like 1982 instead of 2001."

S&P analysts suggested that the next shoe to drop in the banking sector would be Option Adjustable Rate Mortgages, or "Option ARMs." This product, where borrowers essentially choose how much to pay each month, hasn't been adequately stress tested, said S&P. That will be a problem for banks holding these loans and securities linked to them, going into late 2008 and early 2009.

In its global outlook, the strong run seen in international equities has come to an end, said Alexander Young, equity research analyst focused on international stocks at S&P. "We are starting to see lending constraints tighten up in Europe and in other markets," Young said.

And in emerging markets there are red flags rising up over inflation. China's inflation rate is running at about 8% while the latest figures from India put that country's inflation rate at 11%, said S&P.

On a positive note, S&P issued a neutral outlook on the financial sector, up from its prior negative outlook. Analysts believe write downs will continue in the banking sector but that the worst have already been posted. That said, they stressed further detraction of consumer credit and other factors would increase charge-off levels at banks going forward.

S&P analysts issued a neutral outlook on large cap stocks and are favoring growth over value, with underweight recommendations for healthcare and utilities. They predicted the S&P 500 would finish the year with an index value of about 1490, up from its current low of 1270.