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Posted at 9:02 p.m. PST Monday, Jan. 8, 2001

Recession dissent

Forecasts for economies of state and U.S. vary widely BY JENNIFER BJORHUS Mercury News

If you're confused about where the economy is headed, you have plenty of company among the experts who are paid to know these things.

Three New York economists issued reports Thursday through Monday and have predicted: a) A recession is starting; b) the recession is over; c) the United States won't have a recession this year after all.

The three reports illustrate the growing divergence of opinion emerging about just how serious this economic slowdown will become. In part, the conflicts reflect how difficult it is for economists to forecast recessions, which, technically, are two quarters in a row of negative economic growth.

Last Thursday, investment bank Morgan Stanley Dean Witter issued one of the most pessimistic reports yet, declaring that the United States is in a mild recession and that California's utility crisis is a dangerous wild card that could make it worse. The economy will actually shrink by 1.25 percent in the first two quarters this year, according to the report. Richard Berner, the firm's chief economist, said he expects to see increasing pessimism during the coming weeks among economic reports.

On Monday, Edward Yardeni, chief investment strategist for Deutsche Banc Alex Brown in New York, dispatched his view, declaring: ``The Recession is Over.'' For investors, that is. Yardeni argues that investors should act as though the recession has passed and buy cyclical stocks. He said he still thinks Federal Reserve Chairman Alan Greenspan's interest rate cuts will avert a recession. In the meantime, the gyrations are producing a case of economic whiplash, he said.

``I'm getting a neck brace,'' he concludes.

Yardeni was joined Monday by Ian Shepherdson, chief U.S. economist for High Frequency Economics in upstate New York, who concluded: ``The Big Picture: No Recession But Stocks Struggle.'' Shepherdson argues the slowdown under way will stop short of recession. The country's gross domestic product -- the value of all the goods and services it produces -- will grow around 2.5 to 3 percent for the year.

But it's the Morgan Stanley report that raises the most red flags. Although it forecasts a mild recession, it underscores major unknowns, such as the little-understood cycles of a globalized information technology industry, which could deepen the slump. California's utility debacle could have a major economic impact, the authors argue. Not only could it hobble California industry, cutting into the state's exports, but it could wreak havoc with the psychology of investors in the stock market.

``We think the Golden State's problems could still morph into something very nasty (a full-blown financial crisis, for instance) that further weakens the U.S. economy. Indeed, our hunch is that California's brewing energy crisis was one of the many factors in Mr. Greenspan's decision to slash credit rates,'' reads the report, ``California Unplugged -- A Drag on Global Growth,'' released last Thursday.

California produces more than $100 billion worth of goods each year, from semiconductor chips to artichokes. If it were a country, California would rank seventh in the world in the value of total output, just behind France and Italy. Because the supply chain for information technology now criss-crosses the globe, and because the United States is a major buyer of other countries' goods, any stalling here would reverberate in economies around the world, from South Korea to Argentina.

Several California economists are skeptical of the Morgan Stanley report.

Economist Tom Lieser, executive director of the UCLA Anderson Forecast, said he's sticking with his group's original predictions. That forecast, released Dec. 11, calls for a 60 percent chance of a mild recession this year for the United States and a 40 percent chance of a ``recession lite'' for California. Lieser and others downplayed the overall economic significance of the electricity rate increases Californians face.

Michael Englund, chief economist at Standard & Poor's MMS in Belmont, said he hadn't seen the report, but called the group's stance ``speculative.''

``In my mind, the capacity constraint in California will limit the energy demand, but the economy's not going to shrink because of the energy problem,'' he said. ``It's a problem for Gray Davis, but I don't think it means a downturn for the economy.''

Steven Levy, co-founder of the Center for Continuing Study of the California Economy, agreed. Investors might get spooked by the crisis, but the electricity rate increases aren't likely to seriously impact California's economy.

``Stock market valuations are for people that do stock markets,'' Levy said. ``They shouldn't confuse that with the economy.''

http://www0.mercurycenter.com/local/center/economy0109.htm

-- Martin Thompson (mthom1927@aol.com), January 10, 2001