US economy may have bottomed out

The recession threat hanging over the US economy for the past six months is now starting to recede.

Instead, a tacit consensus is emerging that the nation appears to be entering a phase of slow but positive economic growth - a period when progress remains at 3.5 percent or lower at least through the end of the year.

The new view is coming into focus as economists start to get more information from what they now think is the low point in the nation's economy. Last Friday, the Commerce Department said the first quarter gross domestic product (GDP) grew at 2 percent, double what most economists expected.

The positive growth reflected a variety of factors - from a slowdown in imports to better consumer spending in January and February. It now appears that business is finished with those "everything must go" inventory-clearance sales, which have been a drag on the economy.

"It's hard to concoct ways we can now go into a recession," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis, Minn. If the economy is stabilizing, it would hold important ramifications:

* Most Americans could stop worrying about their jobs. Although companies may continue to slice employment, the worst of the layoffs may be over.

* The stock market may become less volatile, which will make Americans feel better about their finances.

* President Bush's standing would likely improve if the economy rebounds quickly.

But how more-robust growth would play out in the debate over tax cuts remains uncertain, since the president has been using the threat of recession as a rationale for a bigger rate reduction.

While the news may be improving on the economy, that doesn't mean Americans necessarily believe it. A survey released today shows that two-thirds of the country believes the economy is in a recession. But that's because many Americans reading about layoffs, or even experiencing them, perceive the economy as worse than it really is.

Even some economists warn that it's too early to say the nation has escaped a recession. The GDP numbers are preliminary, and the government may revise the quarter's GDP lower when it gets better information.

Consumer spending, for instance, may still drag the economy down. It represents two-thirds of GDP. Most surveys show a sharp decline in consumer confidence, which has been reflected in lower retail sales in late April.

Even if the economy has now reached its low point, some economists believe the Federal Reserve will still continue to lower interest rates - from one-quarter to one-half of a percentage point - on May 15, its next scheduled meeting. A rate cut could be justified because a 2 percent growth rate makes it harder for productivity to continue to grow, says David Orr, chief economist for First Union Bank in Charlotte, N.C.

For example, companies are cutting capital spending to try to staunch their losses. In the first quarter, capital spending fell by 6.4 percent. Over the past several years, spending on technology equipment has grown at double-digit rates each year.

"It's one of the paradoxes of the new economy that you need more rapid growth to hold down inflation," says Mr. Orr.

At the same time, some companies are acting differently than they have in past downturns. Traditionally, when the economy plummets, firms cut prices to maintain market share. Now, says Orr, many paper and aluminum businesses are shutting down capacity instead of lowering prices. This has boosted their stock prices in recent weeks.

In fact, since mid-March the Dow Jones Industrial Average has rebounded by about 1,300 points. Stock market commentators have been talking about the economy going into a recession for the past four months. "Now the financial markets are sniffing out that there won't be a recession," says Orr.

Consumers are still gloomy

The mini-recovery in the market has yet to register with Main Street. A University of Michigan survey of consumers, released today, finds that because of layoffs and falling income, one third of all households believe their financial situation worsened in April.

At the same time, most consumers expect a higher jobless rate by year-end. The survey also found widespread doubt that interest-rate cuts will quickly restore jobs and income. Thus, consumers are putting off buying autos, homes, appliances,and furniture. They've become "apprehensive" shoppers, says Richard Curtin, director of the surveys.

Weak consumer spending is likely to show up in the second quarter, especially as higher gasoline prices begin to take their toll.

Look for a boost this fall

Yet lower consumer spending will be countered by some other improvements. By the third quarter the proposed tax cuts, as well as the Fed's interest-rate reductions, will likely take effect, which should give the economy a further boost. Many companies, too, are no longer trying to jettison everything in their backrooms at cut-rate prices.

"Only a few industries, like telecommunications and computers, are still working off excess stocks," says Jerry Jasinowski, president of the National Association of Manufacturers in Washington.

Tomorrow, economists will get a better idea of how the economy is performing when the National Association of Purchasing Managers releases its April survey. Mr. Sohn expects it will show that the manufacturing sector is still shrinking - but at a slower rate.

Even more important, on Friday the government will release the April employment numbers. Sohn anticipates it will show that nonfarm payrolls expanded by 35,000, up from a loss of 86,000 jobs in March. The unemployment rate will rise to 4.4 percent from 4.3 percent. But if the number of new jobs shrinks, he says this would be cause for concern. "It would indicate the economy is weaker in the second quarter and maybe our optimism is unwarranted."

(c) Copyright 2001. The Christian Science Monitor