Analysis: Could Recession Spoil the Party?
Monday, January 1
By Caren Bohan
WASHINGTON (Reuters) - Just weeks after Vice President-elect Dick Cheney warned of a possible recession in the United States, the R-word -- unthinkable at the beginning of buoyant 2000 -- is grabbing headlines and airtime as sliding stock prices and disappointing holiday sales fuel fears about the economy's health.
Is the talk of a recession as the villain of the new year overblown?
While some economists state firmly that it is, several of Wall Street's huge investment firms have been scurrying to slash economic growth forecasts and are boosting the likelihood that a sharp U.S. downturn could hit sometime in 2001.
Economists at many major firms say that, while the odds still favor a ``soft landing'' of slower growth but no recession, the mighty U.S. economy appears more vulnerable now than at any time since the record-breaking expansion began 10 years ago.
``Recession is not in my forecast, but it's a real risk,'' said Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter. ``We are one shock away from a recession.''
Economists rarely go out on a limb to actually forecast recessions -- defined as two quarters of economic contraction -- which usually result from a combination of negative events, or ``shocks.'' For example, many experts blame the 1990-91 recession on the oil-price spike caused by the Gulf War and a credit crunch spurred by the savings and loan crisis.
Instead, economists talk in terms of recession odds. Many Wall Street firms have ratcheted up the chances of a contraction over the next 12 months to 25 to 40 percent, versus 5 or 10 percent that firms saw a year ago.
DOT-COM BUST
A bust in dot-com stocks, a tightening of corporate lending standards and higher energy prices are among the factors that are taking their toll on the economy.
The stock market -- which helped drive the bumper consumer confidence and heavy spending of recent years -- is taking a big bite out of growth as the dwindling portfolios of upper-income consumers cause them to slash their spending.
Businesses also have reduced access to capital, forcing them to cut expenditures on costly plants and equipment.
On the bright side, the housing market -- bolstered by low mortgage rates -- is holding up well while consumers, whose confidence has eroded sharply, still hit the stores for a last-minute flurry of Christmas buying that may save holiday retail sales from being as dire as earlier reports suggested.
Low U.S. inflation affords the economy a safety net, too, because it gives the Federal Reserve more leeway to cut interest rates without having to worry about a destabilizing run-up in prices.
Those who have expressed skepticism about the prospect of a decline in gross domestic product point out that only six months ago the economy, in the second quarter of 2000, was surging ahead at an annual pace of 5.6 percent.
It would be unusual for growth to taper off completely after years of clocking speeds of 4 percent-plus. In the third quarter, growth cooled to 2.2 percent. Fourth-quarter gross domestic product figures aren't available yet.
``All this talk about recession or near recession is way overdone,'' said Ken Goldstein, economist at the Conference Board research group. ``In fact, it's bordering on irresponsibility.''
In the political sphere, Clinton administration officials have leveled charges of irresponsibility at President-elect George W. Bush and Cheney -- who has since softened his comments about a recession to warn of an economic slowdown.
Clinton's economic officials have accused the Bush team of trying to ``talk down'' the economy in a bid to push a proposed $1.3 trillion tax-cut plan. They have also said Bush was needlessly arousing fear in consumers.
But the Bush camp counters that it is offering ``straight talk'' about real risks facing the economy. Bush plans to hold a two-day forum on Jan. 3-4 to discuss the state of the economy.
Some economists have said Bush's warnings of a slowdown may be contributing to the problem, but others dismiss that idea.
``People don't listen to politicians for guidance on what's happening to the economy,'' said James Glassman, economist at Chase Securities in New York, who said what matters most for consumers is whether they have work and how much money they have in the bank or in stock portfolios.
A SUDDEN SHIFT
Glassman's firm predicts the economy will grow by around 1 percent in the first half of 2001, skirting a recession but just barely. Some economists label speed this slow a ``growth recession,'' where growth is still occurring but the country still suffers keenly as jobs are lost and spending falls off.
Whether or not they see a contraction, economists have been struck by the suddenness of the economy's loss of momentum.
``The deceleration in economic activity is the largest we've seen since 1981-82,'' Morgan Stanley's Berner said, referring to the recession at the beginning of the 1980s that came on the heels of double-digit inflation and an aggressive campaign by the Federal Reserve to crack down on high prices.
Highlighting the speed of the deceleration, the Fed on Dec. 19 made a dramatic shift in its official economic outlook.
The Fed, which at its November meeting said inflation and an overheated economy represented the greatest threat to the expansion, switched its view to cite economic weakness as the most significant risk. It passed over a more gradual option in which it could have said inflation and economic weakness were equal risks.
But the U.S. central bank also avoided a more aggressive alternative: trimming rates immediately at the December meeting. It may yet end up regretting the decision to hold its fire, which caused days of selling in the stock market.
However, many economists think the Fed can quickly make up for lost time. The bond market, which often prices in Fed moves ahead of time, is assuming sharp rate cuts on the order of a percentage point or more over the next 12 months.
``I think the Fed's going to ease aggressively starting early in the year and I think that -- plus the fact that market rates have come down as much as they have -- I think will be enough to enable the economy to avoid a recession,'' said Marty Mauro, senior economist at Merrill Lynch. |
