Stephen Roach called a "Doomsayer."
I wonder what they would call us? -bg-
biz.yahoo.com
Sunday May 19, 2:47 pm Eastern Time
Doomsayers Ring Alarm Bells on Recovery
By Eric Burroughs
NEW YORK (Reuters) - As the giant U.S. economy zooms out of its first recession in a decade, some doomsayers keep
sounding alarm bells that the rebound is poised to sour into a deeper funk -- a so-called "double-dip" recession.
The grim scenario goes something like this: consumer spending stumbles,
unemployment shoots higher, stocks head for another nosedive, dormant
inflation turns into suffocating deflation. And the Federal Reserve, having
already slashed short-term rates to 40-year lows of 1.75 percent to spur
growth, will have little room left to cut rates any more.
"The odds of a double-dip in the U.S. economy are not nearly as low as
you have been led to believe," warned Stephen Roach, chief economist at
Morgan Stanley.
He was a lone voice in predicting recession in early 2001 and for months,
has argued persistently that a return to recession is on the way.
Just recently U.S. stocks faltered and the dollar trembled as investors
fretted that the U.S. economy was headed for more trouble since a much-awaited recovery in corporate profits was nowhere
on the horizon.
Part of the fear stems from anxiety that American consumers -- who have shouldered the economy through the recession by
gleefully snapping up homes and autos -- will throw in the towel before business profits and investment returns. That could lead
to more layoffs, spending cuts and pain to come.
But for many economists the message to the bleak pessimists is simple -- think again.
"The recovery dynamic has started," said Paul Kasriel, chief U.S. economist at Northern Trust in Chicago.
Kasriel cited several positive forces: a Federal Reserve intent on keeping interest rates low, government spending on the rise,
building recovery in hard-hit manufacturing, workers logging overtime and capital spending slowly improving.
Yet there are risks, from the heavy debt loads both households and businesses carry, to the persistent weakness in the labor
market, seen most recently in the unemployment rise to 7 1/2-year highs in April.
The shock of a terror attack also could reverse the economy's tentative recovery, as could a misstep by the central bank.
"If the Fed were to start to tighten aggressively sooner than later, I think there's a risk of tipping the economy back into
recession because of the debt situation in both household and corporate sectors," Kasriel said.
"But the Fed doesn't want to do that. Alan Greenspan has given every indication he wants to hold out as long as possible
before raising rates. As long as Alan is afraid to raise rates, that greatly reduces the odds of a double-dip," he said.
Certainly some of the most recent data have shown Americans are in no mood to back down from their shopping sprees. Last
week, reports showed retail sales in April surged more than double economists' forecasts. And consumer sentiment soared to
levels not seen in 1 1/2 years, implying more shopping to come.
PESSIMISTS PERSIST
Also last week, Chicago Fed President Michael Moskow confronted questions from one former journalist who brought up the
fears of a Dutch trader that the U.S. economy is heading for a double-dip recession.
While Moskow said he did not believe such a scenario would unfold, he did concede that this recovery has been built on the
back of the consumer and needs a boost from corporate America.
"In order for this to be sustainable, business firms first have to stop reducing their spending ... then they have to start increasing
their spending," Moskow said.
Perhaps no economist has more ardently argued that the U.S. economy is in bad shape than Morgan Stanley's Roach.
Roach's view is that consumers will run out of steam and the profit squeeze in businesses -- exacerbated by high labor costs
and the lack of pricing power -- will push the economy back into another contraction.
History is on his side, Roach said in a recent research note. In five of the past six recessions the economy has suffered a
double-dip recession as consumers pulled back on spending just as businesses were boosting production.
But other economists argued with Roach's definitions.
"This is not right," said Anirvan Banerji, research director at the Economic Cycle Research Institute (ECRI), whose different
indicators have a strong track record for more than 40 years in predicting turning points in economic cycles.
Banerji said Roach too broadly defines a double-dip recession. If the economy suffers three months of contraction after pulling
out of recession, it does not necessarily qualify as a new recession.
ECRI's indicators, which forecast as far as a year into the future by looking at real-time data on profits, productivity, money
supply and other measures, see no new downturn in the economy though they do predict a tepid recovery.
"People are confusing strength with sustainability," Banerji said. Those calling for a double-dip recession are just ringing "another false alarm," he said. |
