Fears grow of US recession

By Peronet Despeignes in Washington Published: January 30 2001 15:51GMT | Last Updated: January 31 2001 02:36GMT

The risk that the US will slide into its first recession in 10 years rose sharply on Tuesday with the publication of figures showing consumer confidence falling to its lowest level in four years.

The drop bolstered expectations that the country's central bank will cut interest rates significantly when it sets monetary policy on Wednesday.

The Dow Jones Industrial Average jumped 1.7 per cent to close at 10,881.2, the Nasdaq Composite index hardly budged at 2,838.35 and the dollar lost earlier gains against the euro, which settled at 92.6 cents to the dollar.

Bruised and battered by earlier stock market slides, an intensifying wave of corporate job cuts and energy price shocks, the consumer confidence index of the Conference Board, a New York-based business research group, continued its steep plunge from a revised 128.6 in December to 114.4 this month, its lowest level since December 1996.

The index, based on a survey of 5,000 households, has dropped 20 per cent over the past year, surpassing the 15.52 per cent decline in the year preceding the last recession in 1990-1991.

The decline has been at the kind of pace that has presaged past recessions - extended periods of falling output.

"We may be in for a serious downturn," said Jim Coons, chief economist at Ohio-based Huntington Banks. "It could be pervasive and pronounced."

Even before the latest grim figures, the Fed had been expected to cut its key short-term lending rate - the federal funds rate - by half a percentage point to 5.5 per cent, following the surprise half-point cut this month.

But the speed with which the confidence index declined prompted speculation in the futures markets - where bets are made on the future course of monetary policy - that the central bank might even cut rates by 0.75 percentage points today.

Whatever happens, financial markets are now expecting more aggressive rate cuts over the next few months. The futures market on Tuesday indicated strong odds on a fed funds rate below 4.75 per cent by mid-year.

Economists still believe that strong remedial action by the Fed will just be enough to stave off a recession.

Last week Alan Greenspan, the Fed chairman, told a congressional committee that US growth was now "probably very close to zero". But he expressed confidence that a full-blown recession could be averted.

Mr Greenspan said the economy appeared to be in the midst of a "inventory correction" and called a recession a "low-probability" event involving profound changes in the "structure of the economy". He added: "The critical issue . . . is whether the degree of contraction [in growth] is enough to breach the fabric of consumer confidence."

An element of the overall consumer confidence index that tracks sentiment about current conditions declined modestly - suggesting the economy, for the moment, retains momentum.

But the expectations element fell from 96.9 to 77, its lowest since 1993. The survey found a sharp drop in consumers planning to buy big-ticket items such as cars and home appliances.

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-- Martin Thompson (mthom1927@aol.com), January 30, 2001