WASHINGTON – The dreaded R word – recession – is back in play, contributing to Tuesday’s stock market plunge.
But is recession a real possibility?
Many analysts say recession is unlikely this year, that Tuesday’s market sell-off was long-anticipated and would be short-lived as the economy rebounds from a housing slump. Also helping the economy are renewed consumer and business spending, a strong but not overheated labor market and possible intervention by the Federal Reserve, analysts say.
“The economy is percolating along pretty well except for the housing sector,” said Edward Leamer, director of the University of California, Los Angeles’ Anderson Forecast, adding, “We don’t see anything in the data that we monitor that suggests the economy is having any real trouble.”
Stocks had their worst day of trading since the Sept. 11, 2001, terrorist attacks hurtling the Dow Jones industrials down more than 400 points on a worldwide tide of concern that the U.S. and Chinese economies are stumbling and that share prices have become overinflated.
The Dow fell 546.20, or 4.3 percent, to 12,086.06 before recovering some ground in the last hour of trading to close down 416.02, or 3.29 percent, at 12,216.24, leaving it in negative territory for the year.
The repercussions continued today in morning trading in Asia. Shares in Tokyo, Hong Kong, Australia, New Zealand, the Philippines and Indonesia all tumbled more than 3 percent after the markets opened.
Stanford University economist John Taylor said Tuesday’s stock market drop may restore some volatility to what has been an unusually stable stock market, but it is not a reflection of economic troubles.
“If you look at the overall economy, both U.S. and global, you see continued growth,” Taylor said.
Nonetheless, former Federal Reserve Chairman Alan Greenspan brought the R word back Monday, suggesting a recession could come by year’s end. And recent data, including a surprisingly weak durable goods report Tuesday, suggests the economy has not rebounded as strongly as some analysts had expected.
Nouriel Roubini, chairman of Roubini Global Economics in New York and a professor of economics at New York University, had predicted a recession to begin in the first or second quarter of this year and said Tuesday’s market downturn provided more evidence of impending doom. The government today is also expected to sharply lower its estimate for growth in last year’s fourth quarter, down to 2.5 percent from 3.5 percent last month.
“We have lousy economic news,” said Roubini, a former White House and Treasury Department economist. “It’s just the beginning of much worse things to come.”
With the recovery now five years old – long in the tooth by most economic standards – such warnings are not easily dismissed. But other analysts drew a distinction Tuesday between the slow growth they’re seeing and conditions that could tip the economy into recession.
“Recession is becoming, in my opinion, a rather rare event because the government has learned to manage the economy better,” said Keitaro Matsuda, senior economist at Union Bank of California in San Francisco.
Matsuda said he doesn’t see the economy slipping into negative growth “anytime soon.”
“We don’t see that happening in our forecast,” said Kenneth Beauchemin, U.S. economist with Global Insight in Lexington, Mass. “Productivity growth has slowed down, but it hasn’t been terrible, and we expect it to pick up again. And there’s still some slack in labor markets.”
Beauchemin said that although unemployment remains a low 4.6 percent nationally, employers have been posting new openings more slowly during this recovery, leaving more slack in the labor market.
And Tuesday’s data showed the housing slump may be ending. The National Association of Realtors reported that sales of previously owned homes – the bulk of the housing market – rose 3 percent since January, the largest gain in two years.
Beauchemin expects growth to post a “decent” 3 percent this year.
A recent dip in interest rates, helped by Tuesday’s bond market rally, raises another possibility: that the Fed might come to the slowing economy’s rescue and cut rates. Concerns about possible blow-ups in the sub-prime mortgage market also could encourage the Fed to cut rates after pausing this summer in its two-year campaign of raising interest rates to fight inflation.
“There’s going to be more and more talk about the economy being weak and the prospects for the Fed lowering interest rates,” said Ed Yardeni, president of New York-based Yardeni Research.
Yardeni said recession talk “has been brewing” among analysts this year, and Greenspan simply brought it to the fore, catching markets by surprise. He expects the government to report today that fourth-quarter growth fell to 2 percent, but said it will rebound to 3 percent by year’s end as consumers continue to spend, making a recession “not possible” this year.
Consumer confidence rose to a 5 1/2-year high this month, with the Conference Board’s index up to 112.5 from 110.2 in January.
“My view is so far the economy continues to demonstrate that it’s remarkably resilient, with consumer spending and unemployment numbers still looking good,” Yardeni said.
Although the Commerce Department reported Tuesday that new orders for durable goods fell by 7.8 percent in January, more than reversing a December gain of 2.8 percent, Yardeni called the data “volatile” – not enough to stake a recession on.
Businesses have been dialing back their spending in an attempt to sell existing inventories, said Bernard Baumohl, managing director of the Economic Outlook Group in Princeton Junction, N.J.
“That is not necessarily an indication that the economy is in trouble,” Baumohl said. He called tepid business spending a temporary correction for “inventory imbalances.” As business “rev up their inventories again,” Baumohl said, growth could rise to 3.5 percent in the second and third quarters.
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