Of rate cuts, tax cuts, and war

The United States economy has moved into something close to suspended animation.

"A no-man's land between recession and recovery," maintains Robert DeClemente, an economist in New York with Citigroup, a huge banking firm.

The anticipation of an invasion of Iraq hangs heavy over the stock market, and probably over decisions by consumers and business to spend and invest. Many economists are again adjusting down their forecasts of economic growth this year. A few talk of a double dip - a return to a recession.

When Federal Reserve policymakers meet tomorrow, they face a tough decision on whether or not to cut a key short-term interest rate again to give the economy a shove. That Federal Funds rate is already at a 45-year low of 1.25 percent.

The interest rate futures market suggests a 50-50 chance the Fed will do so, perhaps by 0.25 percentage points. It also predicts a 100 percent likelihood that rates will fall by half a percentage point by the next Fed meeting May 6.

A month ago, Fed Chairman Alan Greenspan stated: "The heightening of geopolitical tensions has only added to the marked uncertainties that have piled up over the past three years, creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity."

The widely accepted implication was that the Fed need not do more to boost the economy and that resolution of the Iraqi situation would revive output.

Edward Yardeni, chief investment strategist at Prudential Securities, agrees. He figures the first quarter, also hit by an extremely cold winter, will be weak. Assuming that war starts next week and is quickly over, the second quarter will be "surprisingly strong," with gross domestic product (GDP) rising at a 3 to 5 percent annual rate.

But Paul Kasriel isn't so sure. Some fundamental factors won't go away, notes the Northern Trust Co. economist in Chicago. "The geopolitical risk may be with us long after the fireworks in Iraq," he says, referring to the missile capability of Northern Korea.

Further, it is not so certain that oil prices will plunge as they did in 1991 after the Gulf War ended. Crude supplies are not so abundant this time.

Mr. Kasriel holds that the economy is still adjusting to the bursting of the biggest stock-market bubble ever in the US. The market value of stocks has dived $8 trillion in the past three years.

As a result, household net worth has fallen three consecutive years. Concerned consumers are saving more of their income, putting additional money into bank accounts to reduce risks.

The employment news has not helped consumer confidence. In February, 308,000 jobs overall were lost, 321,000 in the private sector. That was the worst drop since January 1982, a time of deep recession.

Page: 1 | 2