[Mb-civic] Some Economists See Risk of a Downturn
michael at michaelbutler.com
Wed Sep 8 15:28:52 PDT 2004
Some Economists See Risk of a Downturn
The UCLA Anderson Forecast expects growth in '05 and '06 but says there's a
10% chance of a recession.
By Bill Sing
Times Staff Writer
September 8, 2004
The U.S. economy hasn't yet convincingly rebounded from the summer's soft
patch, although some economists expect a pickup.
But could it get worse instead and even turn into a recession?
Relatively few economists are using the R-word outright. More and more,
however, are beginning to warn that a downturn can't be dismissed.
The latest to issue such an alert is the widely watched UCLA Anderson
Forecast. In its latest quarterly outlook, to be formally released this
morning, the group calls a recession a "distinct possibility" in the next
Though the odds of such an unpleasant event still are slight only 10%
"a recession is more likely than the economy taking off," said Michael
Bazdarich, UCLA Anderson Forecast senior economist and author of the
national part of its outlook.
Some other economists put the odds of a recession much higher. But UCLA
Anderson Forecast's mention of recession risk is notable because its less
optimistic stance in recent years has proved to be prescient. It was among
the first to predict the 2001 recession and to anticipate the current soft
The quarterly outlook calls for the U.S. economy to grow at 3.3%
inflation-adjusted rates in both 2005 and 2006. That's not much better than
the 2.8% annualized growth rate posted in the second quarter and down from
the first quarter's 4.5% rate.
"This is as good as it's going to get," Bazdarich said, noting that the
all-important consumer and housing sectors don't have the steam to spark
Talk of a recession comes at a politically sensitive time. The presidential
election is riding partly on voters' perception of whether the economy is
getting better, as President Bush contends, or worse, as Democratic
challenger Sen. John F. Kerry would have Americans believe.
It's also a sensitive time for monetary policy. The Federal Reserve has
been raising its benchmark short-term interest rate on the assumption that
growth will pick up, or at least not slow further. The central bank is
expected to raise rates again at its next meeting Sept. 21.
Perhaps most important, if consumers or businesses fear a downturn, their
resulting caution could trigger one. Indeed, that often is how recessions
To be sure, with a nearly 3% annualized growth rate, the economy is far
from recession, often defined as two consecutive quarters of economic
contraction. (The 2001 recession started in March and ended in November,
according to the National Bureau of Economic Research.) Many mainstream
economists, including UCLA's, call for continued annual growth of at least
3%. Some predict growth to return closer to the 4.5% pace posted in this
year's first three months.
Upbeat forecasters base their view on several factors, including low
interest rates, business optimism, a revival of consumer spending and a
decline in gasoline prices. One optimist, Fed Chairman Alan Greenspan, has
blamed the recent slowdown on "transitory" factors, such as the record-high
gasoline prices seen a few weeks ago.
However, the potential for further energy inflation also has stoked
recession concerns, said Steven A. Wood, chief economist for Danville,
Calif.-based Insight Economics, which conducts weekly surveys of about 50
They are generally putting the odds of a recession at 25% to 33% in the
next one or two years, he said.
And Economy.com, a West Chester, Pa., research firm, said its recession
indicator in August put the risk of a downturn at 32.7% in the next six
months, up from 25.7% in July and only 7.6% in March. A rise above 50%
indicates a probable recession; the indicator last rose above 50% a few
months before the 2001 slump, Economy.com chief economist Mark Zandi said.
The two main factors driving the higher recession risk are weaker financial
market conditions as shown by a sluggish stock market and falling
bond-market interest rates and declining consumer and business confidence,
"We're not near recession territory yet, but there has been a measurable
weakening in economic activity," Zandi said.
Recession risks also have risen because the economy's safety nets have lost
strength, Wood said. The Fed can't cut its benchmark short-term rate much
lower than the 1% it stood at back in June. President Bush's tax cuts have
used up their stimulative effects. Debt-laden consumers and governments are
not in financial shape to significantly turn up their spending spigots.
So an economic shock from a huge sustained jump in gasoline prices or a
devastating terrorist attack could trigger a recession, Wood said.
"If the soft patch were to turn into something more severe, there is not a
lot of ammunition to fight back with," Wood said.
UCLA forecasters' concern is a bit different. Their worry: The current
recovery is vulnerable because of old age.
Although the expansion officially started in 2001, the consumer and housing
sectors haven't been in recession since 1990, so their recoveries are
actually 14 years old, Bazdarich said.
An aged recovery masquerading as a youthful one is akin to "an 80-year-old
in [actress] Meg Ryan's body," he said.
Although expansions such as those of the 1980s and 1990s can last an
entire decade, going beyond that is pressing their luck, he said.
Consumers have spent their cash from Bush tax cuts and the mortgage
refinancing boom, probably anticipating that a continued strong economy
would allow them to pay down debts later while sustaining spending,
Bazdarich said. But if they perceive that the soft patch will stick around,
they might reel in spending to pay down debts.
With consumer spending accounting for two-thirds of economic activity, that
could spark a recession, he said.
"There is not really much upside for consumers from here," Bazdarich said.
The UCLA forecast for California, largely unchanged from its last report in
June, is a bit more upbeat. It calls for "faster but not-yet-rapid growth"
in 2005 and 2006.
The state's growth in nonfarm payroll jobs will outpace the nation's, the
report says, rising from 0.8% this year to 2% in 2005 and 2.1% in 2006.
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