R-word crisis hits US By STEPHEN ROMEI 27aug01

ECONOMIC data due out this week should go a long way towards answering the question that has been dangling like a sword of Damocles over Wall Street for most of the year: is the US economy in recession?

On Wednesday, the Bureau of Economic Analysis issues revised figures for second-quarter gross domestic product. Analysts expect the original 0.7 per cent growth number to shrink to zero or even worse.

With a recession broadly defined as two quarters of declining GDP, a minus number for the second quarter would put the R word back in the headlines.

"If we get that first negative quarter, a recession will seem more real," says Diane Dercher of investment firm Waddell & Reed. "It will open the question in people's minds again."

On Thursday, the bureau releases estimates for third-quarter personal income and consumption, an early hint on how the economy is faring. Analysts expect the number to come in between zero and 0.4 per cent, so a negative result would augur ill for third-quarter GDP.

If both the second-quarter GDP and the income/consumption estimates land in the red, the odds will shorten that the hitherto shaky US economy has fallen into recession for the first time in a decade.

It is just such concerns which are behind the recent fall in the US dollar and some forecasters expect that situation to prevail into 2002.

"The US dollar remains vulnerable to investor anxiety concerning US economic developments and equity market uncertainty," Merrill Lynch currency analyst Neil MacKinnin says.

"The risk of a six to nine-month correction in the US dollar is now very high in our view."

Certainly, the latest data reveals a US economy on life support. Mass layoffs have seen the number of Americans on unemployment benefits rise to 3.18 million, the highest level since September 1992.

Personal and business bankruptcies totalled 400,394 in the three months from April to June, a 25 per cent increase on the previous corresponding period.

"If this isn't a recession, it's the worst non-recession you'll ever see," says Lakshman Achuthan of the Economic Cycle Research Institute.

Even so, there is a world of psychological difference between a slowdown, no matter how protracted, and a full-blown recession.

"No one wants to utter the R word," writes Newsweek columnist Robert Samuelson. "It signifies a symbolic threshold which, if crossed, might worsen consumer, business and investor psychology."

It is the first member of that triumvirate -- the consumer -- who is all important in the present context. As the Federal Reserve made clear last week after announcing its seventh rate cut in eight months, it is household demand that is holding up the US economy.

This is particularly evident in the housing market where prices are rising at their fastest pace for more than a decade. The rise in the value of the family home -- still by far the biggest asset of ordinary Americans -- has been a balm to the burn of falling share prices.

Of course, if this week's revised GDP number and income/consumption estimates are better than expected, the market bulls will bellow another R word: recovery.

http://finance.news.com.au/common/story_page/0,4057,2693593%255E521,00.html

-- Martin Thompson (mthom1927@aol.com), August 26, 2001

Answers

If this recession bottoms now, it will be the most complex and misunderstood recession of all time. Investment-led recessions (which is what we had prior to WW II) ALWAYS take time to level out. It's the inflation-led / tight money response type recession, like every one since World War II, that are V shaped--they hit bottom quickly and bounce right back up.

I've spent my whole working career as a business / economics writer (51 paperbacks, 4 hardbacks), but I am still scratching my head over this one. I must admit, all this "new economy" talk of the past few years has me baffled. Maybe time has passed me by. It will be most interesting to see if some form of new voodoo prevails, governing this business cycle, or if the old, basic fundamentals will rule again.

-- JackW (jpayne@webtv.com), August 26, 2001.

This will certainly be a tell-tale week, and give us good direction as to stock market reaction this Fall.

-- Uncle Fred (dogboy45@bigfoot.com), August 27, 2001.