Recession: Maybe Yes, Maybe No

WALL STREET economists have recession on their mind. They can't stop discussing it. ``Recession probability is fading,'' states the headline of a research item by Mitchell Held, an economist with Smith Barney, Harris Upham & Co.

At Morgan Stanley & Co., Stephen Roach holds that talk of a recession is a ``hoax,'' predicting a pickup in real growth of the United States economy to a 2.5 percent annual rate in the second half of this year.

Taking an opposite view, Gary Ciminero, chief economist at Fleet/Norstar Financial Group, writes a piece headed ``The recession watch begins.'' He expects the downturn to begin before the end of the year.

Gert von der Linde at Donaldson, Lufkin & Jenrette Securities Corporation insists the recession already started earlier this year.

And A. Gary Shilling, an economic consultant, offers ``a recessionist's portfolio'' to his clients - 11 ways to invest and make money in a real slump.

The latest news certainly justifies such chatter. Corporate purchasing managers said this week that their gauge of industrial prospects fell to the weakest point since January 1983, a month after the current economic expansion began.

The Commerce Department said a persistent housing slump pushed construction spending in June to the lowest level in eight months.

These numbers add some weight to the view that the current economic slowdown could be the start of a recession, with national output actually falling broadly for at least one quarter.

Hedging more than Wall Street economists, who are paid to offer firm views, Federal Reserve Board Chairman Alan Greenspan told Congress Tuesday that the nation won't know ``until well into next year'' if the Fed has managed to slow the economy without causing a recession. ``I think we will make it.''

So far, he said, economic indicators don't suggest a recession.

Last month he spoke of the economy facing a greater risk of a downturn than of inflation.

Mr. Held's positive outlook, maintained despite the purchasing managers' gloom, arises partially from the apparent lack of major excesses in the economy.

``Toward the end of an economic cycle,'' he explains, ``demand softens; but, at first unaware of this, production continues apace and inventories build.

``When inventories build too fast, production gets cut, layoffs commence, consumption declines, and inventories continue to pile up. This cycle typically continues until policy stimulus succeeds in lifting demand.''

However, says Held, the latest statistics show that with the exception primarily of autos and apparel, inventories have been ``fairly well controlled'' and shouldn't prompt a recession.

David Levine, another optimist, agrees. The Sanford C. Bernstein & Co. economist notes that in the second quarter, business inventories rose at a $19.5 billion annual rate, even less than the average buildup rate of around $30 billion to $35 billion during an economic expansion.

Mr. Levine counts 14 slow-growth periods in the US since the Korean war.

Of these, six turned into recession when the Fed continued to tighten credit conditions.

Eight were followed by boom conditions, with the nation's output growing at a real 5 percent annual rate or more for at least two quarters.

In five of these eight instances, says Levine, the Fed loosened monetary policy. In three of the periods, the Fed raised interest rates slightly, yet the economy still reaccelerated.

Because the Fed started several weeks ago to lower interest rates, ``the right thing to bet on is reacceleration, not recession,'' says Levine.

Some other economists insist that the Fed has already built a recession into the economy by its sharp restraint in the supply of money over the past year. ``Most of the signs of a classical turning point are already present,'' notes Mr. Shilling.

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