Hints of a Hard U.S. Economic Landing

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Hints of a Hard U.S. Economic Landing Steven Pearlstein Washington Post Service Thursday, November 16, 2000 WASHINGTON If you like the uncertainty of the 2000 presidential election, you will love the U.S. economy next year. . Economists and policymakers have been talking up the likelihood of a soft landing, in which overheated economic growth would slow, but not anywhere near enough to cause an economy shrinking recession. The burst in the dot-com bubble, the slowing of job growth, the decline in the stock market - all were said to be consistent with the much hoped-for soft landing. . But some analysts in recent weeks have begun to warn that the landing may be a bit bumpier than first thought. While recession is still considered unlikely, there is growing fear that the economy may overshoot the runway. . "In my view, we're in for something harder than a soft landing," said Allen Sinai, an economist with Decision Economics Inc. "The bad news is coming in quite quickly now." . Don Hilber, a forecaster with Wells Fargo Corp., said the most likely scenario now was for a "rough landing," which he warned won't be pretty, even if a recession is avoided. He predicts a rash of business failures, layoffs in many industries and a sharp drop in corporate profits and consumer spending. . And Morgan Stanley Dean Witter's chief economist, Stephen Roach, told clients this week to "remain on maximum alert for a global hard landing in the first half of 2001." . Even analysts who are sticking by the soft-landing scenario are now careful to acknowledge the risks ahead. These include another big drop in stock prices, another spike in oil prices or bigger-than expected declines in corporate profits. . On Wednesday, Federal Reserve Board policymakers, though they left rates unchanged, warned that inflation was still a risk. Stocks gave up most of their gains after the warning. (Page 20) . "The recent declines in the stock market, high energy prices and financial market turmoil have added uncertainty to the outlook for near-term economic activity," Bank of America's chief economist, Mickey Levy, said. . Nonetheless, Mr. Levy stands by his forecast that the economy will grow at a rate of around 3 percent next year - a steep descent from the 5.7 percent annual rate recorded this spring but still enough to keep most Americans happy. . This week, Mr. Levy and others in the soft-landing camp got a boost when Abby Joseph Cohen of Goldman Sachs Group said there were "clear signs of economic deceleration but not deterioration." Ms. Cohen's pep talk helped spark a rally on Wall Street on Tuesday that added more than 160 points to both the Dow Jones industrial average and the Nasdaq composite index. . Even optimists, however, acknowledge that if the annual growth rate of the economy slows to below 2 percent for six months or more, it won't matter much that the economy hasn't slipped officially into a recession, which is defined as six months of economic contraction. To most Americans, they say, it will feel like a recession, with the unemployment rate rising to 5 percent, household incomes stagnant and Wall Street in the middle of a bear market. . Recent economic news has hardly been upbeat. Last week, first-time claims for state unemployment benefits jumped 35,000, to 344,000, largely because automakers shuttered plants for a week after finding themselves with too many cars just as consumers began to get cautious about spending. . The government reported Tuesday that retail sales rose only 0.1 percent in October. Data on Wednesday showed that industrial production fell 0.1 percent in October, and that businesses inventories rose in September at the lowest rate since January 1999. . And First Call/Thomson Financial said that analysts have revised their predictions of operating profit growth next year for the 500 companies in the Standard Poor's index, from 15.6 percent to 11.2 percent. . Analysts are divided on whether businesses are finding it more difficult to finance expansion. Already, the flow of capital to young and growing companies has slowed dramatically as venture capitalists have pulled in their horns and the flow of new stock and bond issues on Wall Street has slowed to a trickle. . Banks are also beginning to tighten their lending terms in response to warnings from regulators. The focus of concern is the high volume of syndicated "bridge" loans made to telecommunications, entertainment and computer companies during the last two years, often with the expectation that they would be paid off quickly with the proceeds of stock and bond sales that now appear unlikely. . These developments indicate to many analysts that lenders and investors have begun to take a more realistic view of business risk. . But pessimists say the bad news is just beginning, and that there remains a substantial risk of a full-blown "liquidity crisis," in which lending completely dries up, particularly if overseas investors begin to trim their exposure to the U.S. stock and bond markets. http://www.iht.com/articles/1602.html



-- Carl Jenkins (somewherepress@aol.com), November 16, 2000


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