`Recession is unavoidable' in 2001, economic research firm predicts
BY DAVID A. SYLVESTER
Mercury News
One of the nation's best-known economic research firms, breaking with the consensus of economists, now predicts the United States will slip into a recession by the end of the year -- the first time the firm has officially announced a recession since 1990.
``A recession is unavoidable,'' said Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York City. ``It's only gotten worse.''
The institute made a similar call in February 1990 -- five months before the 1990-91 recession started. Then, just as now, most economists, including Federal Reserve Chairman Alan Greenspan, were expecting the country would stumble along with weak growth but avoid a recession.
A recession is generally defined as two successive quarters of declining growth in production, employment, sales and income. The U.S. fought off a sharp slowdown in the mid-1990s but has not had an official recession in a decade.
The institute is one of the most influential economic forecasting groups. Its methods were developed by Geoffrey Moore, a pioneer of business-cycle research who developed the well-known Index of Leading Economic Indicators and also taught statistics to Fed Chairman Alan Greenspan. The institute has developed dozens of indicators that forecast the direction of world economies.
`Serious' signal
Other economists took notice of the institute's new forecasts, which will be released publicly next week.
``It clearly signals how serious the situation is,'' said Mark Zandi, chief economist at Economy.com, an economic research group in Pennsylvania.
So far, most economists are still looking for a rebound by the end of the year, although many are starting to rethink their optimism.
``The consensus is increasingly less certain,'' Zandi said.
The recent welter of economic reports may appear confusing, but they measure the economy at different stages. Some show where the economy is right now. Others are ``leading indicators'' that report the first signs of change. For instance, the unemployment rate measures what is happening right now in the economy, but a rise in unemployment claims would point to what will happen in the future.
The institute's prediction of recession is based on several leading indicators, including a sharp deterioration in future employment. Overall, the institute sees the resilient service sector as likely to weaken and join manufacturing in a recession.
The institute also has officially announced it expects Japan to go into a recession this year. Since the U.S. and Japanese economies account for almost half of the total world output, this means there is an increasing chance of the first worldwide recession since 1973-75. Both Canada and Mexico, two major trading partners with the United States, would be dragged into recessions, as would the export-dependent Taiwan and South Korea.
The European economies are the largest group still not clearly facing a recession, although they are weakening.
`Global backdrop'
``As a result, there is no locomotive anywhere in the world to help pull the U.S. economy out of a recession,'' the institute said in an advisory report. ``This global backdrop will tend to prolong and deepen the U.S. recession.''
It's not clear what the institute's twin predictions mean for California, since it studies national, not regional, trends. But state economists believe California is insulated from a broad downturn because its economy is more diversified than before.
The biggest question is whether the high-tech industries are facing a short-term problem from producing too much Internet equipment, computers and software temporarily or a longer-term drop in demand.
The bad news couldn't come at a worse time for Wall Street -- and some of Silicon Valley's former high-flying tech companies. The stock market just ended a wretched first quarter, partly pulled down by companies like Cisco Systems and Palm.
The Standard & Poor's 500 index, a broad gauge of the market, has fallen 24 percent -- more than the 20 percent needed to mark an official bear market -- from its peak a year ago. It gained 12.38 points Friday to close at 1,160.33.
The Nasdaq composite index finished up 19.69 at 1,840.26, after closing Thursday at its lowest level in more than two years. The tech-heavy index has fallen 25.5 percent during the first three months of 2001, showing its worst performance ever for a first quarter and more than 63 percent off its peak reached last March.
Cisco Systems has fallen 59 percent this quarter, Siebel Systems of San Mateo 60 percent and Palm 70 percent. In contrast, Advanced Micro Devices soared 92 percent this quarter, after a sharp sell-off late last year, and Apple Computer was up 48 percent, also after year-end selling.
Some economists are holding out hope that the United States is facing only a temporary setback as companies sell off a stockpile of goods built up in stores and warehouses during the high-living times of last year.
Sung Won Sohn, chief economic officer at Wells Fargo, thinks the U.S. economy will recover in the second half of the year. But unlike state economists, he expects California to suffer more than the rest of the country. By his own estimate, California's total production of goods and services will grow only 1 percent this year, less than half the rate of the overall U.S. economy.
``The concern is over the availability of power, not just its cost,'' Sohn said.
If a recession starts, the U.S. government can resort to two basic weapons: tax cuts and interest-rate cuts. The large federal surplus allows Congress to cut taxes and pump more money into consumers' pockets, and the low level of price inflation means the Federal Reserve System can reduce interest rates more without overheating the economy.
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