A funny thing happened to the economy on its way to recession: It’s taken a detour.
That, at least, is the view of a growing number of economists – including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected.
Economists also cite swift policy responses, including a sharp reduction in interest rates by the Fed – to 2 percent from 5.25 percent last September – and the distribution of fiscal-stimulus checks to millions of Americans, as factors possibly easing the downturn.
“A couple months ago it seemed like we were on the abyss,” said Jay Bryson, global economist with Wachovia Corp., referring to the seizing up of credit markets and the collapse of Bear Stearns. “Things have changed … . The numbers we’ve seen recently haven’t been as bad as we were led to believe just a few months ago.”
Wachovia now puts the odds of recession at 45 percent, down from 90 percent in April, and expects growth in gross domestic product of 0.6 percent at an annual rate in the first and second quarters of this year, followed by 1.2 percent growth in the third and fourth quarters. While he doesn’t expect a recession, he says growth will be very weak through next year.
Indeed, plenty of economic warning signs remain, as reflected in plunging consumer confidence data and polls reflecting deep unease among voters. Rising prices for food and other commodities are prompting Americans to trim some spending and stoking concerns about inflation. The ongoing run-up in oil prices has pushed the average price of a gallon of gasoline to $3.73 as of Tuesday, according to AAA, the automobile group. Home prices continue to decline and many economists expect that to depress spending in the months ahead.
On Tuesday, Federal Reserve Chairman Ben Bernanke, while noting that market conditions have improved in recent months since the Fed’s actions, also cautioned that they “are still far from normal.”
Still, Bryson and other economists note that though two main pillars of the economy, the labor market and consumer spending, have faltered, they have not collapsed as they did in past recessions. Job losses have been less severe than they usually are in recessions. And many economists think the government’s earliest estimate of first-quarter GDP growth will be revised upward. In February, Global Insight joined Goldman Sachs, Morgan Stanley, UBS and Merrill Lynch in declaring the U.S. to be in recession. Now, Global Insight’s Brian Bethune says that while the firm is still forecasting a recession, “it’s conceivable we could avoid it,” thanks to “the massive policy response we’ve seen” since he and others began warning about the risks facing the U.S. economy.
Bruce Kasman, chief economist at J.P. Morgan, said that while earlier this year it seemed like momentum was carrying the economy into a clear recession, there’s only “a slightly better than even chance” of a recession now. “Even though there are meaningful drags from the credit crisis and energy costs, the economy is showing resiliency,” he said.
The question remains open, since recessions typically aren’t officially diagnosed until some time after pain hits consumers. A common definition of a recession is at least two consecutive quarters of negative GDP. But the National Bureau of Economic Research – the nonprofit group that is the official arbiter of when recessions begin and end – defines a recession as a period of significant decline in economic activity across GDP, income, employment and retail sales that lasts more than a few months.
John Lonski, Moody’s chief economist, said recent labor market data and signs the credit crunch is easing on Wall Street have made him less gloomy than he was a few months ago. “Recent evidence suggests there’s a chance the economy might stabilize before this summer,” he said. Even Alan Greenspan, who in early April said the U.S. was in the “throes of recession” and is going through the “most wrenching” crisis since World War II, has more recently toned down the warnings, saying the U.S. is in an “awfully pale recession.”