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WASHINGTON: As the grim notion of recession appears to be taking
hold in the United States, debate among economists is shifting from
whether a downturn will occur to how long and how severe the slump
will be.
Whether the world’s biggest economy is in
recession will not be known until later this year at the earliest,
but a growing number of analysts have already made the call.
“Our view is edging closer to recession,
albeit a mild one,” said Joseph LaVorgna, economist at Deutsche
Bank in New York, reacting to a spate of weak economic reports.
A key question is whether interest rate cuts by
the Federal Reserve and a stimulus package passed by Congress will
spark fresh growth or if the efforts will be, as economists say,
“pushing on a string.”
The recession camp was bolstered in recent days
by shockingly weak reports on job creation—showing the first loss
in employment since 2003—and a survey showing a contraction in the
massive US services sector for the first time since the 2001
recession.
The latest data “pretty much seals the deal on
the recession call,” said Myles Zyblock, analyst at RBC Dominion
Securities.
“The question now turns to how long and how
deep this contraction might be.”
Even at the Federal Reserve, where officials
have generally avoided the “R” word, some officials have let the
word slip out.
Richmond Federal Reserve Bank President Jeffrey
Lacker said that while he sees sluggish growth, “I can also see
the possibility of a mild recession, similar to the last two we have
experienced—in other words, shallow and with a slow recovery.”
Morgan Stanley economists Richard Berner and
David Greenlaw said in a note to clients, “Recession has arrived,
in our view, heralded by intensifying weakness in incoming data, and
the economy faces a rocky road ahead.”
Berner and Greenlaw added however that the
downturn will be limited and that 2008 as a whole will show modest
growth of 1.3 percent after declines in the first two quarters.
They said the likely impact of tax rebates from
the economic stimulus plan will provide a temporary boost but that a
strong recovery is not likely until 2009, when they see growth at
2.7 percent.
Others see a more ominous scenario and say the
central bank and other officials have been slow to react.
Merrill Lynch economist David Rosenberg said
evidence of a recession is piling up with dismal figures from the
Institute of Supply Management services sector report, “the
collapse in auto sales” in January and “unprecedented tightening
in credit conditions.”
This “adds to our concern that we are facing a
much deeper downturn than we saw in 2001,” and means the Fed may
be forced to make an emergency rate cut before its next meeting
March 18.
Nouriel Roubini, a New York University
economist, who has been bearish on the economy for over a year, said
most indicators “are heading south and suggesting a deep and
severe recession that has already started.”
Roubini said the Fed is moving aggressively
because it “is seriously worried about this vicious circle and
about the risks of a systemic financial meltdown.”
Joseph Quinlan, economist at Bank of America,
said that regardless of whether a recession develops, the so-called
misery index—the sum of unemployment and inflation—has reached a
three-year high of 9.1 percent, a sign of growing trouble.
“With the US economy already on thin ice ...
the higher the misery index in the coming months, the greater the
odds of a consumer-led US recession,” Quinlan said.
“The latter, in turn, could trigger a vicious
circle of more job cuts, rising unemployment and an even greater
level of retrenchment on the part of US consumers.”
RBC’s Zyblock said the Fed rate cuts and
economic stimulus efforts will help ease the downturn.
“We believe it to be highly premature to
characterize current policy efforts as impotent,” he said.
“Policy makers have learned from the script of
post-1989 Japan and the US experience of the 1930s that today’s
collapse in real estate should be treated as an ominous deflationary
threat. We believe policymakers have begun, and will continue, to
attack the problem with the seriousness it deserves.”
-- AFP
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