Tuesday, January 02, 2001
Are we headed for a recession?
Growth slower, but hasn't stopped yet
By John J. Byczkowski
The Cincinnati Enquirer
Not so fast. The United States is not in a recession. Not yet, anyway.
November unemployment was 4.0 percent, a hair higher than its 30-year low. The Nasdaq Composite Index is just below 2500. The economy is growing at about a 2.5 percent annual rate.
The last time the Nasdaq was at 2500 was in August 1999. Back then, the economy was growing at a near 6 percent clip, and unemployment was at 4.2 percent.
Compared to then, the pace of the economy today, is, well ... not so fast, and that's apparently the problem.
In the past few months, there's been a great downshifting of expectations. As the new year begins, everyone seems to have less optimism, starting with the nation's economists.
In the monthly survey of economists by the newsletter Blue Chip Economic Indicators, predictions of economic growth for the end of this year have fallen by a full percentage point. Where the consensus had been looking for a 3.5 percent rate of growth, it's now at 2.5 percent.
And you can feel it: When the economy slowed to 2.2 percent growth in the summer from 5.8 percent in the spring, that was $77 billion less the economy produced. That's the equivalent of Sears and Home Depot disappearing off the face of the Earth.
Put another way, “that's like being in a car going 60 miles an hour, and suddenly going 20,” said Randell Moore, editor of Blue Chip. “You haven't hit a wall, but you really feel the deceleration.”
Growth might be slowing, but it's still growth. A recession, by definition, is six months where the output of the economy falls, where growth turns negative. Blue Chip's survey indicates that through the middle of 2001, growth won't fall below 2.3 percent.
But economists have been wrong, by and large, in the past five years, as the economy has grown faster than expected, Mr. Moore said. They could just as easily be wrong this time around.
For those who watch the indicators more closely, a recession isn't yet in the cards, but it is not out of the question. Anirvan Banerji, an economist at the Economic Cycle Research Institute in New York, watches 30 indicators — on manufacturing, services, interest rates, employment and more.
His index is creeping close to a level that would portend recession, brought there by rising energy prices, declining profits, reduced business investment, falling stock prices and actions by central banks worldwide to raise interest rates and slow the economy.
The key, he said, is consumer confidence, which has already begun to drop from historic highs.
“If confidence plunges, then I can see a whole slew of leading indicators going down,” he said.
By some measures, manufacturing is already in a recession, as both output and employment have fallen. The nation is being propped up by the service sector, which could begin to falter as well if consumer confidence declines, Mr. Banerji said.
A big test for consumer confidence will occur Friday, when the U.S. Labor Department is scheduled to report December unemployment. If the unemployment rate jumps, the stock market could falter.
At that point, the Federal Reserve has a decision to make: It might step in and reduce interest rates. That would tell consumers that it's not asleep at the wheel, but it could also send the wrong message to investors — that it's willing to step in whenever the stock market gets the jitters.
If the Fed does nothing when it meets at the end of this month, confidence might fall further.
“It's really a tightrope,” Mr. Banerji said.
So, will there be a recession in 2001, or won't there?
President-elect George W. Bush is gathering a group of economists, Wall Street leaders and business executives Wednesday and Thursday in Austin, Texas, to discuss his own view that the economy is going into the tank.
Mark Zandi, chief economist at Economist.com, puts the chances at only 1 in 10, “in part because I think the Fed will respond.”
Ed McKelvey, senior economist at Goldman Sachs, said the risk is higher, 1 in 3, because jobless claims have gone up significantly, and “consumer confidence is beginning to show some cracks that are disturbing. You could be in for something a little rougher than you've bargained for.”
Are we headed for a recession?
• Manufacturing: Excess inventory a danger
• Wall Street: Not all stocks off
• Interest rates: Housing market may stay strong
• Retail sales: Falling confidence could curtail spending
• Media: Newspapers most vulnerable to downturn
• Transportation: Trucks, airlines may feel pinch
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Intel debuts portable MP3 player
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