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Fri, Feb 07, 2003 - Page 12 News List

US faces possible return of recession

HIGH ANXIETY Jitters about a planned invasion of Iraq is weighing on the minds of Americans, causing corporations and consumers to hold off on spending and investments


Marine Commandant Michael Hagee, bottom right, greets marines with the 1st Marine Expeditionary Force in the Kuwaiti desert south of Iraq on Wednesday. The ongoing tension in the region is causing American corporations and consumers to tighten their belts, threatening the nation's modest economic rebound.


Worried about a possible war, Wall Street has been in a funk this year and the news on across the country hasn't been any better. Business executives are freezing new spending and hiring, fearful of big commitments in the face of so much uncertainty.

Some analysts think the national anxiety, heightened by the loss of the space shuttle Columbia, could be enough to derail the feeble recovery and throw the country back into recession.

"The probability of a double-dip recession has certainly risen," said Sung Won-sohn, chief economist at Wells Fargo in Minneapolis. "The economy is still mired in a pretty soft patch and we have not made it to firmer ground."

"Soft patch" was the phrase Federal Reserve Chairman Alan Greenspan began using last fall to describe a significant slowdown in economic growth. The economy, which had been growing at a solid 4 percent rate in the summer, screeched to a near halt during the final three months of the year, managing to eke out a tiny 0.7 percent growth rate.

To buy some insurance against a possible double-dip recession, the Federal Reserve in November cut interest rates by a bigger-than-expected half point, pushing the overnight borrowing cost for banks down to a 41-year low of 1.25 percent.

But so far, the extra boost from lower interest rates has not been enough to jump-start the economy. Unemployment has been stuck at an eight-year high of 6 percent as businesses have laid off nearly 200,000 workers over the past two months.

Many analysts believe when the government reports the January unemployment figure on Friday it will show that businesses did add a small number of workers last month but not enough to show an improvement in the 6 percent jobless rate. In fact, they are forecasting that unemployment will hit 6.5 percent or even higher by this summer.

"The economy is very fragile right now," said Mark Zandi, chief economist at Economy.com. "Businesses are queasy. They are not investing or hiring and consumer confidence is still weakening. Any little thing that goes wrong could push us back into recession."

The Conference Board reported consumer confidence fell again in January and now stands at a nine-year low, adding to worries that consumers, who have been the one bright spot in the economy for over a year, could put away their pocketbooks.

The report on the anemic 0.7 percent growth rate for the gross domestic product in the October-December quarter showed that consumer spending, which accounts for nearly two-thirds of the economy, slowed to a 1 percent growth rate, the weakest performance in nearly 10 years.

The concern is that more bad news -- such as a US invasion of Iraq that took an unexpected turn for the worse or a new terrorist attack in the US -- could be the final blow that would guarantee another recession.

"The real risk is the war," said David Wyss, chief economist at Standard & Poor's in New York. "It can go bad in all sorts of ways and that could push us into a double-dip."

Still, even economists who are worried that the weak economy could slip back into recession rate the possibility of that occurring at only a one-in-three chance -- although they say the odds have gone up in recent weeks, especially in light of the new tumble stock prices took in January.

But many economists say the most likely prospect is that the economy will gradually improve this year, helped along by continued low interest rates supplied by the Fed and further tax cuts from Washington.

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