Wednesday April 4 4:03 PM ET Survey: U.S. Has 90 Pct Chance of Recession

By Michael Kahn

SAN FRANCISCO (Reuters) - The U.S. economy faces a 90 percent chance of going into recession this year and will only stage a weak recovery by year's end, a widely-respected economic forecast said on Wednesday.

The quarterly survey of the national economy by the Anderson School at the University of California, Los Angeles (UCLA), said the slump -- while brief -- would mark the end of the gold-rush mentality spawned by the ``New Economy.''

``In summary, while we adjust to a new lifestyle, we can expect sluggish growth, and probably a couple of negative quarters,'' economist Edward Leamer wrote in the report. ``If history is a guide, the worst part of the adjustment will be over in 2001, and a recovery to be complete in 2002.''

Last December -- a time when most other forecasters were predicting continued growth -- the UCLA survey pegged the likelihood of a recession in 2001 at 60 percent. A recession is defined as two consecutive quarters of contracting gross domestic product (GDP (news - web sites)).

Leamer said there are major warning signs the nearly 10-year U.S. economic expansion is over. Manufacturers are scaling back hours at plants -- a potential prelude to layoffs -- and the unemployment rate is creeping up.

Combined with a flood of grim corporate profit reports issued by many U.S. firms during the last quarter of 2000, these factors make the chance of recession nearly certain, the report said.

The survey sees GDP contracting to 0.2 percent in Q2 2001 and 0.7 percent the following quarter before growing again at 0.1 percent in Q4. For 2001, GDP was pegged at 0.7 percent, a far cry from the whopping 5 percent in 2000.

``Don't expect the adjustment to be complete by 2002 and don't expect growth rates like 1998 and 1999,'' the report said. ''It'll be 3's not 5's.''

Rate Cuts A Help

The U.S. Federal Reserve (news - web sites) Bank's recent aggressive moves to cut interest rates have also helped to lower the recession risk a bit, but they won't be enough to offset likely substantial declines in business investment and consumer spending for major items like cars and computers, Leamer said.

The Federal Reserve once again sliced interest rates another half-percentage point, taking the key federal funds rate down to 5 percent, its lowest level since mid-1999.

``(But) it doesn't alter the fact that the future isn't as good as we thought it would be,'' Leamer said, adding, ``Better stop popping those monetary pills and get on with the adjustment. That will make 2002 come sooner.''

Leamer said fears over the future should also rein in consumer spending, which had been fueled by a high-flying stock market over the past few years. Instead of saving money, many Americans used their windfalls to snap up expensive cars and homes in the belief the good times would never end.

But now that equity prices have returned to earth, consumers and business realize they have to be much more prudent with their pocketbooks, Leamer said.

A Dollar Saved ....

``The lifestyle of the year 2002 is going to be one in which we prepare for the future in the old-fashioned way: Mainly we save,'' Leamer said in an interview. ``Businesses will continue to invest in tech and the 'New Economy' but they will do it in a considered and more thoughtful way.''

The UCLA report pegged consumption growth dropping sharply from 5.3 percent in 2000 to 1.7 percent in 2001. After that, however, it is expected to rise slightly to 2.2 percent, the forecast said.

The UCLA report also predicted the U.S. unemployment rate would climb to 4.8 percent in 2001, up from 4 percent in 2000. The report also predicted a continued jobless rate increase in 2002 to 6.1 percent, which if reached would mark the highest since 1994.

Overall inflation was also expected to remain tame, easing to 2.7 percent in 2001 and 1.8 percent in 2002. Inflation was 3.4 percent in 2000.

The core inflation rate, measured as the consumer price index minus food and fuel, was expected to fall to 2.3 percent in 2001 from 2.4 percent in 2000, the report said. CPI will dip to 1.7 percent in 2002, according to the forecast. http://dailynews.yahoo.com/h/nm/20010404/bs/economy_forecast_dc_1.html

-- Carl Jenkins (somewherepress@aol.com), April 04, 2001