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Wednesday May 23 4:49 PM ET

Recession May Have Begun -- Research Firm

By Daniel Sternoff

NEW YORK (Reuters) - The Economic Cycle Research Institute, which tracks business cycles in the world's leading economies, said on Wednesday that its prediction of the first U.S. recession in a decade was moving from forecast to fact.

The private research firm in March forecast the economy was headed for recession after a broad array of composite indexes it has designed to predict recessions and recoveries began to warn that the economy was in more than a mild downturn.

ECRI last made a recession call in February 1990, several months before the official onset of recession later that year.

This week, after comparing the current performance of top economic indicators with their behavior during every U.S. slowdown and full-blown recession of the past half century, ECRI concluded: if history is any guide, recession is likely already here.

``The indicators which define a recession are now in patterns seen only in recessions,'' ECRI research director Anirvan Banerji told Reuters in a telephone interview.

``There is no spin or room for interpretation here at all. It is completely factual. We are not talking about where the economy will be in the future, but in the determinants of where we actually are in a business cycle,'' he said. While most textbooks define recessions as two straight quarters of shrinking gross domestic product (GDP) -- that has not yet happened -- ECRI said the economy has met nearly all criteria under the definition used by the National Bureau of Economic Research (NBER), the nation's arbiter of the start and end of recessions.

Viewing a recession as a ``pronounced, pervasive and persistent decline in output, income, employment and sales,'' Banerji said the numbers bore out the bad news.

PRODUCTION, JOBLESSNESS SLUMP; GDP TO FOLLOW

As far as output is concerned, Banerji said that industrial production has declined for seven consecutive months.

``When is the last time that happened without a recession in progress? Never. Never at all,'' Banerji said.

While the broadest measure of output -- quarterly GDP -- has not contracted in a decade, Banerji noted that GDP growth was positive in the first quarter of the past four recessions as defined by NBER.

That is because a recession dated as starting in, say, March, would show GDP expanded in the first quarter as whole.

``The fact that GDP was positive in the first quarter (of 2001) doesn't say anything about whether a recession is already in progress,'' Banerji said.

The government on Friday is expected to revise down its estimate for first quarter GDP from a preliminary annualized gain of 2.0 percent to 1.5 percent, according to a Reuters poll. Second quarter figures will not be released until July.

As for employment, Banerji said the loss of 276,000 jobs in the past two months decreased total employment by 0.2 percent.

``A two month drop of 0.2 percent has never been seen in the last four decades except in a recession,'' Banerji said.

Furthermore, he said that the unemployment rate, which has risen 0.6 percentage point from a decade low of 3.9 percent in October to 4.5 percent in April, has never risen that much except when the economy was in a recession.

Banerji said the fact unemployment remains low by historic standards cannot preclude a recession.

He noted the jobless rate was also low at the start of six recessions between the 1940s and 1970s, including a rise from 2.5 percent during the 1953-54 recession to a cyclical peak of 6.1 percent.

``A low initial unemployment rate has never prevented a recession from occurring. There are a lot of fallacies being propounded by the spinmeisters,'' he said.

SALES IN PRONOUNCED SLUMP

As for sales, he said a composite measure of manufacturing, trade and retail sales was down 1.6 percent in the six months through March.

``Such a large drop has never been seen without a recession in the last half century, except in July 1956 and July 1989, when recessions followed a year later,'' Banerji said.

And as for incomes, another piece in the NBER definition of recession, Banerji noted that while U.S. personal incomes have not posted significant declines of late, they did not fall much during five of the last nine recessions either.

ECRI was founded by the late Geoffrey Moore, a former Research Director at the NBER.

-- (M@rket.trends), May 25, 2001

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Friday May 25 12:15 AM ET

Greenspan Says U.S. Economy Not Out of Woods

By Daniel Sternoff

NEW YORK (Reuters) - Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) on Thursday left the door open to more interest rate cuts to counter the risk of further economic weakness, but indicated that the Fed's aggressive rate-slicing campaign may be winding down.

Greenspan said the U.S. economy remains at risk of weakening more than anticipated, but added the five sharp interest rate cuts the Fed has already made this year should offer the economy ''substantial'' support by year-end.

``This period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response,'' Greenspan told the Economic Club of New York.

``But we also need to be aware that our front-loaded policy actions this year should be providing substantial support for a strengthening of economic activity later this year,'' he said, later noting that Fed actions are impacting the economy faster now than in the past.

``Today virtually all business people are reading off the same database and as a consequence they are behaving in a far more synchronous manner and the consequence is to very substantially speed up the process,'' he said.

The Fed chief said that while firms have made progress depleting an inventory glut, further weakness in business investment and corporate profit growth and fragile consumer confidence could spell further trouble ahead.

And he added that inflation pressures remained contained, suggesting plenty of latitude for the Fed to reduce rates further, if needed.

Greenspan's speech came nine days after the Fed lowered interest rates by an steep half-percentage point for the fifth time this year to boost the shaky U.S. economy and was his first in-depth address on the economy in three months.

Fed policymakers next gather on June 26 and 27.

CUTS TO COME, BUT END MAY BE IN SIGHT -ANALYSTS

Greenspan led off the hotly anticipated remarks with a joke about his famously obscure speeches.

``Tonight I'm going to do something quite different,'' he then added. ``I'm going to speak very clearly and no one will have a clue what I said.''

His prediction turned out to be accurate as his carefully chosen words led to a variety of interpretations.

Financial markets and some economists took Greenspan's warning that there remained a risk of more economic weakness than expected as a sign more rate cuts could be in the offing. U.S. Treasuries climbed in Asian trade on this hope, and U.S. stock index futures rose immediately after the Fed chief's address.

``I wouldn't imagine there is any reason to doubt we could easily see another 50 basis point cut in June,'' said John Lipsky, chief economist at J.P. Morgan Chase & Co.

``Even though he is reassuring about the future, he emphasized the need to make policy with regard to the outstanding risks, and emphasized there is little reason to worry about inflation,'' Lipsky said.

But others drew a different conclusion.

``Greenspan is very clear in pointing out that there are still downside risks and circumstances for further easing,'' said Dana Johnson, head of research at Banc One Capital Markets. ``But in referring to the front-loading of rate cuts and their lagged effect, he is clearly telegraphing that he expects the pace of easing to slow.''

Greenspan cautioned that consumer spending, while currently soft although not ``unduly'' so, could weaken over the next few quarters because of declines in personal wealth. Fed officials keep a sharp eye on consumer spending because it accounts for two-thirds of U.S. economic activity.

``There are also downside risks to consumer spending over the next few quarters,'' the Fed chairman told economists.

``We can expect the decline in wealth that has occurred over the past year to restrain household spending relative to the growth of income, just as the previous increase gave an extra boost to household demand.''

He cautioned that consumer sentiment remains ``fragile''.

NO INFLATION ZEST

Greenspan stressed that inflation was under control and would likely remain so for now, suggesting the Fed has room to lower rates without risking a flare-up in price pressures.

``The lack of pricing power reported overwhelmingly by business people underscores an absence of inflationary zest,'' he said. ``With energy inflation probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained.''

His remarks contrasted with those of some other Fed officials who have recently warned that inflation could rear its head later this year.

Earlier on Thursday, Fed Governor Laurence Meyer -- noted for his tough stance on price pressures -- warned ``inflation remains above the rate that I would find acceptable over the longer run'' and cautioned against the central bank going too far in cutting rates and overstimulating the economy.

Greenspan said the sharp rise in energy prices likely contributed to the swift softening in the U.S. economy and cautioned that higher natural gas prices in particular would likely ``weigh on the economy in the short run.''

On a positive note, he said that the important process of depleting bloated inventories was ``well-advanced,'' but he said that high-tech stocks still were high.

``Overall, inventory investment of high-tech producers has probably turned negative, but a period of substantial liquidation still appears ahead for these products,'' he said.

The Fed chief repeated that he was optimistic about the future course of technology-driven worker productivity gains, which keep wage pressures low, saying corporate desire to boost profits has not weakened.

``The persuasive evidence that the growth of structural productivity remains well maintained and that prospective long-term rates of return probably have been only marginally diminished suggests a solid underpinning to capital spending,'' he said.

Of stock prices, Greenspan said the Fed should not move to prevent declines in asset markets, but that its job was instead to respond to the economic consequences of market swings.

``Our only realistic alternative is to lean against the economic pressures that may accompany a rise in asset prices, bubble or not, and address forcefully the consequences of a sharp deflation of asset prices,'' he said.

-- (M@rket.trends), May 26, 2001.