Reports by FBR Investment Management Inc. and Morgan Stanley said today that the mortgage meltdown appears likely to push the U.S. economy into a moderate recession during 2008. American Banker’s Kate Berry covers a report by FBR managing director Michael Youngblood:

“Non-agency mortgage credit performance is deteriorating more rapidly and more broadly than previously,” he wrote. Household unemployment rates in October rose in 208 metropolitan statistical areas, covering 65% of U.S. cities, while payroll employment rose in 211 areas, making up 63.3% of the U.S. total, he wrote. “These substantial changes in a single month suggest that labor market conditions are worsening broadly across the U.S.,” Mr. Youngblood wrote. “Indeed, we believe that these conditions are characteristic of a recession in economic activity.”

Subscribers can read the full coverage at American Banker, which reports Youngblood’s assertion that weakening labor market conditions are now showing signs of supplanting poor underwriting as the driver for borrower defaults. But Youngblood’s take on things ends up looking positively sunny compared to a new report issued today by Morgan Stanley:

We’re changing our calls for US growth and monetary policy. 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% 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% over that longer period.

Morgan Stanley’s Richard Berner and David Greenlaw, who co-authored the report, say that the Fed is likely to reduce the Federal funds rate by 100 basis points over the next nine months, as a result. The rest of the Morgan Stanley report is well worth your read; it notes that the financial conditions at present have worsened even compared to a few weeks ago and now are close to what was seen in the Spring. Further, Berner and Greenlaw say the changes now taking place represent “a more fundamental deleveraging and re-intermediation of the banking system that will last well into 2008.”