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January 8, 2001 Firms Say Economy Grinding to Halt

By REUTERS Filed at 4:09 p.m. ET

NEW YORK (Reuters) - Three major Wall Street forecasters now predict the U.S. economy will grind to a halt this quarter and one of them said a full-blown recession in the first half of the year will snap the record expansion.

Pointing the finger at eroding consumer confidence, weak manufacturing, high energy prices and a sharp fall in equity prices, Wall Street investment banks Morgan Stanley Dean Witter, Goldman Sachs and research firm ISI Group said the economy was about to stall after a decade of growth.

Morgan Stanley predicted the economy will sink into recession -- defined as two or more quarters of economic contraction -- in the first half of 2001. Goldman said gross domestic productwould shrink slightly in the first quarter and ISI forecast zero growth in the first half of the year.

``The cumulative forces of contraction are both accelerating and deepening in the U.S.,'' Morgan Stanley's chief economist Stephen Roach told Reuters.

Last Wednesday, the Federal Reserve took markets by surprise and slashed its benchmark overnight bank lending rate by half a percentage point to 6.0 percent in a rare inter-meeting action. Economists said the move showed the Fed was worried the risks of recession were rising.

U.S. growth slowed dramatically in the second half of last year. The government's latest reading on GDP growth showed a sharp slowdown to a 2.2 percent annual pace in the third quarter of 2000 from 5.6 percent in the second.

Roach predicted GDP would shrink by an annual rate of 1.25 percent in the first half of 2001.

Goldman Sachs on Friday shifted its outlook from growth to contraction, with the firm now calling for GDP to shrink at a 0.3 percent yearly pace in the first quarter of 2001, down from their previous forecast of 1.5 percent growth.

And New York-based ISI said in a Monday report it expected zero growth in the first two quarters of 2001, what they defined as a ``mild recession.''

Until recently, most of the big brokerages had only seen less than a 1-in-3 chance of recession this year.

FED ON GUARD

Wall Street's gloom on Monday stood in sharp contrast to remarks from Federal Reserve Bank of Atlanta President Jack Guynn, who predicted 3.0 percent GDP growth for 2001 and called the U.S. economy the ``envy of the world.''

Still, Dudley said a newly aggressive Fed was in part responsible for their decision to stop short of predicting an outright recession.

He predicted the Fed would chop rates by another half point when it meets on Jan. 30-31. Most Wall Street firms still expect a quarter-point cut later this month.

Roach said last week's rate cut was a ``downpayment'' toward further reductions in borrowing costs not far down the road.

He said the Fed, which tightened its monetary spigots six times between June 1999 and May 2000, may have gone too far in trying to slow what it saw as an unsustainable rate of growth that threatened to ignite inflation.

WALKS LIKE A DUCK

U.S. measures of consumer confidence have tumbled recently to their lowest levels since the global financial crisis in late 1998 when Russia defaulted on its debt. The manufacturing sector has seen five consecutive months of contraction.

Government data last week showed the most first-time unemployment claims filings in 2-1/2 years. Meanwhile, the technology-weighted Nasdaq index has plummeted more than 50 percent since hitting its all-time high in March 2000, further dampening consumer spirits.

``All of that together to me is a classic sign of a U.S. economy that has now moved into recession,'' Roach said.

While stopping short of predicting a recession, Goldman Sachs chief economist Bill Dudley said there was little difference between his forecast and Morgan Stanley's.

``It's small potatoes. We're basically saying it's going to be a recession in all but name,'' Dudley said. ``It's going to walk like a duck and talk like a duck even if we think we're going to avoid a duck.''

www.nytimes.com/reuters/b...-fore.html

-- Martin Thompson (mthom1927@aol.com), January 09, 2001