U.S. slowdown threatens to spread globally

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U.S. slowdown threatens to spread globally

Posted at 9:28 p.m. PST Saturday, March 17, 2001

BY DAVID A. SYLVESTER

Mercury News

The U.S. economy -- the main engine of world growth for the past two years -- is faltering more abruptly than expected, raising the risk of turning a global slowdown into a recession.

Throughout the 1990s, the world's economies balanced each other, some growing fast while others slumped. But the international boom in demand for tech goods in the past two years -- and a subsequent wave of government moves to slow growth worldwide -- has meant that the world's largest economies have a greater chance of weakening all at once.

``Just as we were in a synchronized tech boom in the last couple of years, we now find ourselves in a global tech bust,'' said James Paulsen, chief investment officer at Wells Capital Management, a part of Wells Fargo Bank.

The danger is that a recession in a major economy now, like the United States, will ripple through the world, dragging down countries that export goods to U.S. consumers and businesses. In turn, as overseas countries weaken, they will buy fewer American exports, worsening the U.S. downturn.

``There are a whole bunch of dominoes lined up right now,'' said Lakshman Achuthan of the Economic Cycle Research Institute in New York. ``If the United States falls down, the others don't have the momentum to offset it. They are more likely to join us.''

So far, most economists don't expect a U.S. recession, let alone sharp global repercussions. They point to a strong economy in Europe and expect the United States to grow slowly this quarter, then rebound. They point to an expected cut in interest rates Tuesday by the Federal Reserve Board that will make it cheaper to borrow and spend.

Signs of weakness

However, some of the latest signs of where the global economy is headed, particularly in the United States, are not good. On Friday, the Economic Cycle Research Institute reported that its weekly measure of the direction of the overall U.S. economy continued to worsen.

``The risk of a recession has never been higher,'' said Achuthan. ``It would take a big change to get off the recession track.''

The picture on the jobs front is also disturbing. Although the national unemployment rate is a historically low 4.2 percent, the institute's index of future employment trends declined in February to its lowest point since the 1981-82 recession. This reflected rising jobless claims, less overtime worked, and an increasing rate of layoffs -- all of which precede the loss of jobs by four to six months.

``That's an indicator that is nothing short of ominous,'' said Achuthan, managing director of the institute that is one of the foremost authorities on business cycles in the world. ``Ominous is a word we haven't used in a decade.''

The U.S. manufacturing sector is already losing jobs. The institute's leading manufacturing index contracted by 19 percent in February, again the worst since 1981-82. This is particularly worrisome for Silicon Valley because technology goods -- computers, software, Internet equipment, instruments -- are closely tied to the U.S. manufacturing sector and its capital spending on equipment.

In Silicon Valley, three of the biggest employers here -- Intel, Cisco and Hewlett-Packard -- have alerted analysts that their sales are slowing worldwide. ``December was like someone turned the lights out,'' said HP Chief Executive Carly Fiorina when she told analysts of slowing sales in the United States and the Asia-Pacific region.

On Wednesday, John Chambers, Cisco's CEO, also warned that demand is slowing worldwide. ``Our challenge is to fix this before it spreads in a major way to Asia/Pacific, Latin America or Europe,'' Chambers told the Greater Boston Chamber of Commerce.

The specter of a worldwide recession marks a significant change from the 1990s. For instance, the 1990-91 U.S. recession was shared only by the United Kingdom, Canada and Australia, making it an ``English-speaking'' recession. Then, when Asian currencies collapsed starting in 1997, the United States began to grow fast, boosting these countries by buying their exports.

Tighter money

That's when the world economy began to overheat. Central banks throughout the world raised interest rates, making it more expensive to obtain credit, buy high-ticket goods and expand businesses. In late 1999 and 2000 central banks worldwide took 130 separate actions to tighten credit, including several by the U.S. Federal Reserve, Achuthan said. Now, the world is feeling the pinch.

So far, most economists expect the United States to avoid a recession. Forecasts by nine U.S. economists at banks and investment banks showed that on average, they expect the real Gross Domestic Product -- the overall measure of goods and services without inflation -- to rise at an annual rate of 0.2 percent in the first three months this year, and pick up to 3 percent by year's end.

Only two of them -- the UCLA forecasting group at the Anderson School and economic research director Kathleen Camilli of Tucker Anthony -- expect a recession of two quarters before resuming growth.

``My forecast of a two-quarter recession is an educated guess based on 20 years of daily observations of the U.S. economy,'' said Camilli. ``However, a recession or contraction is a process, and it's impossible to determine at the onset its length, depth or breadth.''

But although economists are often accurate while an economic trend continues, they make their biggest forecasting mistakes when the trend changes direction. Last December, this group of nine economists expected average growth of about 2.2 percent in the last quarter of last year -- twice what it ended up being.

These mistakes come from economic models based on past trends rather than on cycles, says ECRI's Achuthan. In July 1990 -- the very month the United States began its last recession -- only two economists out of 40 polled by the Wall Street Journal forecast a recession. They expected much what they expect now -- that the Fed would lower interest rates and stimulate slow growth. As late as September 1990, Fed Chairman Alan Greenspan said there was no recession.

``Economics is the profession that makes astrology respectable,'' said James Stack, president of InvestTech Research, who thinks a U.S. recession has already arrived.

A U.S. recession would be likely to ripple through Asia hardest. Japan -- one of the biggest export markets for the United States -- is teetering on the brink of another recession. Other Asian economies also appear to be slowing, and South Korea in particular is highly dependent on the United States.

The U.S. boom of the late 1990s has masked some of the effects of the Asian crisis when the currencies were devalued and economies declined. ``The United States imported so much that these economies took off unexpectedly in 1999 and 2000,'' said David Ingram, an international economist with Economy.com.

Positive signs

But Europe still shows signs of economic strength, with strong consumer confidence and job growth. With only 2 percent of its overall GDP for the ``Eurozone'' countries linked to U.S. exports, it is in the best position to withstand a U.S. slowdown.

Moreover, the United States has a larger proportion of service jobs than before -- which are less vulnerable to a manufacturing downturn. Also, demand for tech goods may pick up sooner than for other manufactured goods because software and computers more quickly become obsolete.

Richard Carlson, chairman of Spectrum Economics, a consulting firm in Palo Alto, believes the demand for tech goods will rebound strongly. Broadband telecommunications will be needed for better access to the Internet, wireless communications should increase demand for semiconductors made by companies such as Intel, and the move to Internet-based software should benefit software sales at Oracle and Sun Microsystems.

The drop in Nasdaq stock prices will prove healthy for Silicon Valley, he said. ``Last year was nuts,'' he said. ``We wasted a lot of talented engineers and software people on investment scams. Everybody's crying that we're returning to normal. Normal's not that bad.''

Contact David A. Sylvester at dsylvester@sjmercury.com or (408) 920-5019.

-- Swissrose (cellier3@mindspring.com), March 19, 2001


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