February 22, 1995 in Nation/World

Bearish Analysts Say Signs Point Toward U.S. Recession Most Experts Still Predict A Slowdown, But No Recession


A few bearish economists have come out of the woods, predicting the U.S. economy will founder enough to fall into recession and possibly convince the Federal Reserve to actually lower interest rates by the end of the year.

These economists are a small minority. Most forecasters expect growth to steady this year at an annualized rate of about 2.5 percent. But as data mount showing some deceleration is under way, the minority is likely to expand.

Pockets of softer data have already appeared, such as last week’s January retail sales figures that signal less enthusiastic consumer spending. January sales rose 0.2 percent, the same as in December. The average monthly rate in 1994 was up 0.6 percent.

A senior Commerce Department economist who spoke on condition of anonymity said he believed auto retail sales have peaked. He noted although January’s auto data were clouded by reporting system changes, “certainly, auto sales were down quite substantially from December and it’s not all reporting. There is a lot of anecdotal evidence” of weakening auto sales, he added.

The administration’s 1996 fiscal budget released last week included a forecast for only one interest rate increase this year, which has already occurred.

And chief White House economic adviser Laura Tyson has told reporters that she expected “lower short-term interest rates” as soon as the end of 1995.

Former Fed Gov. Martha Seger, who was a front-runner in predicting the 1990-1991 recession, told Knight-Ridder last week that another recession was on the way.

“I wouldn’t be at all surprised to see a recession begin in the fall,” she said, noting that the key economic sectors of housing and autos are already decelerating.

Seger, who heads Martha Seger and Associates in Birmingham, Mich., said flaws in national economic data may conceal the true economic picture for a while, but weakness triggered by the Fed’s tightening moves is already working through the economy.

Home sales and housing construction are based on contracts that take several months to complete, so the underlying state of this sector is worse than the headline numbers show, Seger said.

Furthermore, sales of consumer goods, especially autos, are already on a down trend, she said. Special rebates to encourage offloading of inventories are rising in number and some plant closures have been announced, she noted.

Gary Shilling, president of A. Gary Shilling & Co. in Springfield, N.J., sees an earlier recession than Seger. “It looks to us as though we are now going to see 2 percent first quarter (growth), drifting into recession by the middle of the year,” he said.

Shilling was skeptical that the Fed could achieve a soft landing, whereby it slows growth down but not so far that it disappears. The Fed has never managed to achieve this, he noted.

Although not predicting a downturn this year, Lacy Hunt, chief economist at Hongkong Bank Group in New York, said the Fed would try to forestall one by beginning a series of interest rate declines, starting with 1/4 point at the end of 1995.

He said growth in the final quarter of the year would “be slowing to 1 percent or slightly less.”

Even if the recession manages to miss 1995, some economists say it will come in 1996 instead. Robert Brusca, an economist with Nikko Securities in New York, is looking for a downturn early in the year.

Some economists who are not forecasting a recession said it was still possible one would occur within the next year.

Roger Brinner, chief economist with DRI/ McGraw-Hill in Lexington, Mass., said the chance of a recession this year was “a very close call, with growth in the third and fourth quarter forecast at 1 percent.”

He said he expects lackluster retail sales throughout the spring, as consumers react to adjustments in their flexible mortgages and to tax bills. February’s colder-than-normal weather will also help dampen auto sales, home sales and sales of durable goods linked to housing.

To those economists who see a long expansion still ahead, Shilling, who has observed many a recession, gave a word of caution: “You go so rapidly from rapid growth to recession.”

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