Business Forecasters: Recession Unlikely

NEW YORK (Reuters) - Business economists believe a U.S. recession is unlikely thanks to a policy of ``aggressive'' rate cuts by the Federal Reserve, according to a survey conducted during the last two weeks of April by the National Association for Business Economics.

The survey results reflect the consensus of macroeconomic forecasts from a panel of 27 professional forecasters who are members of the NABE. The survey was taken before the U.S. Labor Department released the April U.S. employment report, which showed big downturns in total and manufacturing payroll jobs and hours worked during the month.

Richard B. Berner, NABE president and chief U.S. economist at Morgan Stanley, said that while the business outlook was cloudy and profits were under severe pressure, NABE panelists have remained ``steadfast'' in their belief that a recession is unlikely.

``Panelists believe that an aggressive Fed will sustain modest economic growth for the balance of the year and into 2002,'' he said.

The Fed has aggressively slashed short-term borrowing costs by 2.00 percentage points so far this year to 4.5 percent in its ongoing campaign to revive the sluggish economy.

The NABE panelists left their 2.0 percent 2001 growth forecast for real GDP intact, but the mix for 2001 is more downbeat than in the February survey.

Panelists lowered their sights on 2002 real GDP growth to 3.1 percent from 3.5 percent.

The panel assessed the chances of a U.S. recession at 35 percent in 2001 and 25 percent in 2002, odds that were only modestly higher than three months ago, NABE said.

A full 78 percent claimed that a recession that began in 2001 would be ``milder than the usual post-WWII recession,'' while 7 percent said it would be ``deeper.'' The remaining 15 percent said it would be ``about average.''

Higher energy costs boosted inflation forecasts as measured by the Consumer Price Index in 2001 on a year over year basis to 3.0 percent from 2.6 percent.

The NABE panel said it expected substantially lower short-term interest rates in 2001 and 2002.

By and large, panelists believe that the Fed has conducted monetary policy ``just right'' over both the recent past and throughout the current expansion. NABE panelists attributed the economic slowdown largely to a ``classic inventory correction'' and to the impact of last year's Fed tightening.

They said the sharp drop in the stock market was also an important factor in the slowdown, but one that is behind us now with prospects for ``moderate gains'' going forward.

INVESTMENT SLOWS, BUT EXPORTS CUSHION BLOW

The panel left its median GDP growth forecast for 2001 unrevised from the pace registered in the February survey, but with a weaker mix of growth, slower growth on a fourth-quarter over fourth-quarter basis, and a lower trajectory of short-term interest rates.

Real GDP is still expected to grow 2 percent on a year-over-year basis in 2001, but with greater weakness in the cyclical business fixed investment and inventory components, and with a fourth-quarter over fourth-quarter gain in 2001 of only 2 percent versus 2.3 percent in the February survey.

A more accommodative Fed policy posture was assumed in the most recent survey.

Despite the lower rates, however, the median forecast for GDP growth in 2002 was lowered to 3.1 percent from 3.5 percent in the prior survey.

Business fixed investment is now expected to post only 2.4 percent growth in 2001 versus the 4.0 percent forecast held earlier. Inventories are expected to accumulate by only $12 billion in 2001, down from the $29 billion forecast in February.

Upward revisions in net exports for 2001 offset the downward impact of the investment forecasts on annual GDP growth for the year. But the weaker forecasts for the export and import items reinforced the more pessimistic trajectory for the economy.

The weaker outlook for trade can be largely attributed to the sharp and unexpected narrowing of the monthly goods and services trade deficit reported for February, though weakening prospects for global growth certainly contributed to the smaller export and import forecasts overall.

LOWER CORPORATE PROFITS, WEAKER PRODUCTION

The generally weaker outlook for the economy was associated with downward revisions in forecasts for corporate profits and industrial production for 2001.

After-tax corporate profits are expected to contract by 3.5 percent in 2001 versus a February forecast of a 0.3 percent gain, and the 2002 forecast was nudged lower to 6.0 percent growth from 6.3 percent.

Industrial production is now projected to grow only 0.3 percent in 2001 versus the prior forecast of 1.2 percent, and the 2002 forecast for this index was also moved lower to 3.0 percent from 3.4 percent.

Upward revisions were also seen in the inflation forecasts for 2001, due mostly to ongoing strength in energy costs. The median forecast now calls for a 3.0 percent gain in the consumer price index in 2001 on a year-average basis versus the 2.6 percent median forecast registered in the February survey.

NABE panelists expect GDP growth of only 1.4 percent in the second quarter. The quarterly forecasts for the following six quarters are all in the 2.5-3.5 percent range, a sizable downshift from the 3.2-3.7 percent range seen in February.

The economists are now incorporating the stronger-than-expected 2.0 percent GDP gain in the first quarter, which accounts for the unchanged median forecast for annual GDP for 2001 as a whole.

PERSONAL NOTE: If California doesn't lead the country into a recession then I've been reading Grassroots for nothing for a very long time. Sounds like this group of economists are paid cheerleaders.

-- Guy Daley (guydaley1@netzero.net), May 09, 2001

Answers

No wonder economics is called the dismal science. Dismal it is, science it isn't, unless you consider astrology scientific. The power fiasco in California will be felt far and wide, if it isn't being already. And, similar problems of lesser magnitude are beginning to show up elsewhere. The shortage of natural gas isn't going away soon. Neither is the rise in gasoline prices.

Another underlying economic factor little discussed is the affect of the huge expenditures that were undertaken to mitigate y2k impacts. For most companies these were expenditures which did not contribute to improving their place in the market, just staying there. Some who tried to improve efficiency and effectiveness with new enterprise software found themselves worse off. For example Hershey, Multifoods and Whirlpool encountered serious problems and huge losses. Royal Doulton China (UK) went bankrupt. Who knows the extent to which the embedded chip problem is a factor in the CA power crisis, the gasoline and pharmaceutical industries? A quick check of the CA generation outages of 5/7/01 indicated 111 down of which 61 were unplanned, 57 planned and 13 both. Not sure what that last category means. Hope this isn't a trend. Earlier in the year the planned and unplanned were about even and the totals were usually only 50 to 60.

Maybe these cheerleaders, excuse me, economists could also explain just what and when reductions in interest rates are going to do. It might some time in the future stimulate more borrowing, which is already a serious problem. On the other hand it might just do exactly whayt it did in 1929 - nothing. In case the Fed isn't aware, yhey might also check with the Japanese. Their rate is now ZERO. Everybody knows how well they are doing.

-- Warren Ketler (wrkttl@earthlink.net), May 09, 2001.

Oops! Sorry, that's 37 planned. Can't read my own writing.

-- Warren ketler (wrkttl@earthlink.net), May 10, 2001.