Six months ago, economists were split over prospects for the US economy. Some predicted that a deep recession was inevitable. Others forecast a brief stumble. Both were wrong.
Now, a consensus is forming that the US soon will begin a steady, albeit slow recovery, with the economy growing at about a 1 percent annual rate in the fourth quarter of this year and accelerating gradually toward a 3 percent pace by late next year.
Yet, the jury still is out on that one, and the optimists have little evidence to present. The case rests on the assumption that the Federal Reserve's spate of interest-rate cuts and the tax-refund checks now being mailed will spur the economy to life.
"That reasoning is both unsound and disingenuous," said John Makin, an economist at the Republican-leaning American Enterprise Institute in Washington, who challenges the widespread notion that the US economy is about to begin recovering.
"No one really knows how much -- if at all -- these standard counter-cyclical measures will boost spending, and over what time their effects will appear," Makin asserted. "It is time for economists to quit touting a second-half recovery."
Makin's view isn't isolated.
Ed Yardeni, chief investment strategist for Deutsche Banc Alex Brown in New York, believes the US economy is "just going to be crawling along the bottom for a while" in a malaise much like that of the early 1990s.
"A lot of the same elements are present now -- lackluster growth, disappointing profits and excesses in the financial system," Yardeni said. "We don't yet have widespread job insecurity, but that could happen if unemployment goes up."
The economy of the early 1990s didn't respond to rate cuts very quickly, Yardeni points out. The Fed cut its target rate on overnight loans between banks by 5.5 percentage points between November 1989 and December 1992, yet the slump continued through late 1993.
For the four years beginning with the second quarter of 1990, a period that included the recession, the economy grew at a 1.5 percent annual rate. At last, in 1994, growth accelerated to 4 percent.
This time, the US central bank has reduced rates by 2.75 percentage points over the past eight months, and Fed policy makers have conceded that signs that rate cuts have had much effect are hard to find. Long-term interest rates haven't fallen appreciably since the Fed began its round of rating-cutting Jan. 3. The yield on 10-year Treasury notes, a benchmark for mortgages, has edged down to 4.966 percent from 5.158 percent at the start of the year.
The value of the US dollar, which ordinarily should be falling in the wake of the Fed's rate-cutting, has continued to rise, crimping US exports and exacerbating the slump afflicting America's manufacturers. Moreover, at a time when many economists predicted the US would be in a recovery, the economy has been bouncing along the bottom at an annualized growth rate of less than 1 percent, with the possibility that revised figures may show that gross domestic product shrank in the second quarter. With manufacturing and computer-related industries sagging, profits and capital investment weak and the stock market working off its excesses, the economy is hobbled by a case of blahs like those of the early 1990s, Yardeni says. The impact of advance tax-refund checks isn't certain.
Although economists insist that the US$40 billion it would pump into the economy can't be dismissed, some tax experts are skeptical about how much of it consumers actually will spend.
The question economists haven't been able to answer is how the economy will get from the current stagnation to the kind of moderate growth they're predicting for next year, and whether growth will rebound before consumer confidence weakens.
That's not critical yet, but it is disconcerting, Yardeni says. "If the rate cuts and the tax refund don't work, companies will conclude there's a lower bottom than anyone thought, and they'll cut back on employment further."
If unemployment rose rapidly, economists say, it would scare American consumers and prompt them to cut back on spending, tipping the economy into recession. "We're still very much in the recession danger zone," Yardeni said.
Not everyone is so troubled by the current doldrums.
"If the economy's in the process of gaining strength, you're not going to know that for some time," said James Glassman, senior economist at JP Morgan Chase.
"Wherever you look -- autos, housing -- you see hints of a possible pickup," Glassman said. "If you've got the Fed stepping on the gas and you've got fiscal policy going in the right direction, something's got to happen."
"The factors are in place for a pickup in economic activity," said Mickey Levy, chief economist at Banc of America Securities. "Stimulative monetary policy. Tax cuts. Lower energy prices. My guess is, we start to see one in the third quarter."
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