Stocks View: Slowdown or Ugly Recession?
Saturday April 28 3:54 PM ET
By Pierre Belec
NEW YORK (Reuters) - The U.S. economy is changing and Wall Street is telling those bruised investors that there may be something more serious ahead than just a run-of-the-mill slowdown.
After being pumped up for five years, stocks have crumbled over the past 12 months. Despite several recovery attempts, a lot of investors still sense that the economic environment is rapidly deteriorating and the nation could be slammed by a recession.
``Avoiding a recession at this stage in the U.S. would be unprecedented, given the reading we now have,'' says Lakshman Achuthan, managing director of the Economic Cycle Research Institute (http://www.businesscycle.com).
``In fact, our weekly leading indices look worse now than they did during the recession of 1990 when we last called a recession,'' says Achuthan. ``Never in the past have our indices looked as bad and we've been able to avoid a recession.''
If Achuthan is right, there would seem to be little that Alan Greenspan (news - web sites), the nation's Maestro of economics, can do at this stage of the game to prevent a recession from stunning the world's once healthiest economy.
What is the Economic Cycle Research Institute's claim to fame? For one thing, its founder was Geoffrey H. Moore, ``Father of Leading Economic Indicators,'' a monthly gauge that forecasts trends in the economy three to six months in advance. Moore's other credit is that he was Greenspan's economics teacher at New York University.
GLOBAL CONTAGION?
In a preliminary report, the Commerce Department (news - web sites) said on Friday the gross domestic product rose by a surprising 2 percent annual rate, as strong consumer spending offset weakness in business investment.
But some analysts thought that the first of a series of estimates of the nation's growth disguised weakness in key areas of the economy. The thinking was that the way the economy is going, GDP (news - web sites) could be scaled back later.
With the world's biggest economy shaky, there's also the danger that the global economy could be taken down, the research firm says.
The International Monetary Fund (news - web sites) chimed in this week to say that the global economy was at a critical juncture.
``The world economy is certainly in a quite critical phase,'' IMF Managing Director Horst Koehler told the group's spring meetings in Washington. ``There is a deceleration of economic activity in the United States, which is stronger and faster than most had expected a month ago, and there is no region all over the world which (is) taking up the slack which means there is a slowing down of the global economy.''
Global recessions are particularly problematic because there is no locomotive to pull the other weak economies out of recession.
Just last September the IMF forecast U.S. growth at 3.2 percent in 2001, but the global lending institution apparently misread the impact that Greenspan's boom-busting rate increases between 1999 and 2000 would have on the American economy. Now, the IMF is forecasting growth of just 1.5 percent, the slowest in a decade, and 2.5 percent in 2002.
The U.S. gross domestic product's annual growth has spiraled from an impressive 8.3 percent to only 1.1 percent from the last quarter of 1999 to the final quarter of 2000.
The hope is that the Fed's four interest-rate cuts since the beginning of the year will mitigate the economy's downturn, which could mean a shallower recession.
Indeed, that may already be happening -- if the early estimate of growth in the first quarter of 2 percent holds up.
The National Bureau of Economic Research, the official arbiter of U.S. recessions, said in early April that there is no recession. But the research firm has been off by a country mile in dating recessions before. During the last recession, it announced in April 1991 that a recession had begun in July 1990 and finally disclosed in December 1992 that it had ended in March 1991.
Laksman's Economic Cycle Research Institute has a good track record in spotting changes in the economy. Its Weekly Leading Index, which dates back to the late 1980s, gives a snapshot of what's currently happening in the economies, instead of reporting what took place 30 or more days before. The ECRI was dead on when it forecast a U.S. recession in 1990 and the call was done in real time.
The current massive cuts in the American jobs market, which are making headlines almost daily, will further shake consumers' confidence in the economy, the firm says.
Indeed, the pessimism is so thick that you could cut it with a knife. Consumer confidence tumbled in April as U.S. households turned more gloomy about current and future business conditions.
Recession Climate Spreading
The Economic Cycle Research Institute says recessions now appear to be unavoidable in the United States, Japan, Korea and Taiwan, which together represent half of the world's gross domestic product.
``What's troubling about this thing is that there are no obvious areas of stronger or rising demand in other parts of the world that could help offset the weakness being felt everywhere else,'' says Achuthan.
In the 1990-91 recession, the world experienced an ''English-speaking'' recession -- the United States, Britain, Australia and Canada went through slow times while non-English speaking countries -- in Asia and continental Europe -- continued to grow, thus creating demand that offset the weakness in other countries.
``Therefore, that recession was not as bad as it would have been, had all economies been falling,'' Achuthan says.
The ECRI estimates that recessions are also likely to hit Mexico and Australia while serious slowdowns are expected in Canada, Germany, Spain and Switzerland. Growth will moderate in Britain, France, Italy and Sweden, it says.
Only two economies are currently bucking the trend, New Zealand and India.
The institute uses its Weekly Leading Index to spot turning points in business cycles. Last fall, the gauge signaled the United States economy moved lower and then it recovered in January 2001 when the Fed started lowering interest rates. But the WLI has since been on a steady downhill slide.
The index can flag down a recession three months before the more famous Leading Economic Indicators because it is frequently updated with new information, the institute says.
The stuff that goes into the WLI includes a nation's money supply and stocks and bond mutual funds, which provide a reading about how rich people feel, i.e. the wealth effect.
It also tracks The Journal of Commerce-Economic Cycle Research Institute Materials Price Index, a commodity index that is sensitive to the industrial business cycle. The index measures the spread between U.S. Treasury and corporate bonds, which reflects shifts in Wall Street's sentiments. Mortgage applications and weekly jobless claims also go into the mix.
The clinical definition of a recession is two straight quarters of declines in growth. On average, recessions last 10-1/2 months. The worst one lingered for 16 months between 1974-75 because it was a contagion that bled all of the world's economies.
Recessions Tough To Spot
Recessions can be tough to figure out. Often, experts can't know how deep an economy was in recession until it was in the middle of one. In other words, they can only be identified with hindsight and the end of a recession can only be measured by the last quarter's growth rate.
A worsening unemployment rate is a good clue that a recession is brewing. In the U.S. case, the jobless rate has increased from a low of 3.9 percent and now stands at 4.3 percent. During the 1990-91 recession the jobless rate was close to 7 percent.
Indeed, Wall Street has its work cut out. First it has to figure out if the economy is in the jaws of a recession. Next, when will the economy grow back to its potential of 3.5 to 4 percent growth and when will corporate earnings pick up again. Historically, the stock market leads the economy by six to nine months.
For the week, the Dow Jones industrial average was up 231 points at 10,810. The Nasdaq composite index was off 88 at 2,075 and the Standard & Poor's 500 index edged up 11 at 1,253.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com.) |
