http://news.independent.co.uk/business/news/story.jsp?dir=94&story=71178&host=3&printable=1

Bush sounds alert on threat of looming US recession

By Philip Thornton, Economics Correspondent

09 May 2001

The President of the United States and his deputy yesterday gave their starkest warnings to date that American could plunge into a slump.

President George Bush said he was "very concerned" about the state of the economy, while Dick Cheney, the Vice President, stunned the markets by talking about recession. The bleak outlook came as new figures showed the productivity of US workers had fallen for the first time in six years, dealing a severe blow to hopes that the New Economy miracle would help avert a full-blown slump.

The White House said the President was "very concerned" about the state of the economy, calling the drop in productivity "an additional sign of weakness". His deputy went even further, describing the US as on the "front edge of a recession". "We don't know whether we're going to tip into negative territory or whether we've sort of hit bottom here," he told CNN.

The gloom was compounded by the unexpected fall in the rate of productivity ­ the first drop since 1995. Productivity, a measure of how much workers produce for every hour worked, fell 0.1 per cent in the first quarter compared with a year ago. This compared with the fourth quarter's revised 2 per cent increase and a peak of 8 per cent in the last quarter of 1999. In early afternoon trading, the Dow Jones Industrial Average dropped 91 points to 10,844.

Alan Greenspan, the Federal Reserve chairman, has said repeatedly that technological advances had given a boost to the potential growth rate in the US. But economists warned the strong productivity figures of the last few years might only have been a temporary, cyclical phenomenon.

Meanwhile, unit labour costs ­ a key measure of inflation pressures ­ soared 5.2 per cent, the sharpest rise since the last quarter of 1997. Yesterday's figures came in well below analysts' forecasts, who had expected a productivity gain of 1.2 per cent and a 4.4 per cent rise in labour costs.

Patrick Franke, at Commerzbank, said: "Has the New Economy failed its first serious test? Today's data will be seen as supporting the position of sceptics who have argued that there really was no productivity miracle." The sharp rise in unit labour costs and drop in productivity will add pressure on the Fed to cut interest rates next week. It has already cut rates by 2 percentage points this year. Productivity allows an economy to grow faster without triggering wage inflation. Slower productivity gains and rising labour costs would cut margins and hit corporate profits. It could also lead to rising inflation, thanks to higher wage bills, which would restrict the Fed's ability to cut rates. "I don't think inflation fears are out there yet," said one US analyst. "But with energy costs going up and productivity going down, it is something we have to keep an eye on."

The fall in productivity was driven by a fall in output as the economy slowed but an increase in hours worked. This could reverse in the current quarter as recent massive lay-offs feed through.

-- Swissrose (cellier3@mindspring.com), May 09, 2001