Economists lack an appetite for declaring a recession

When the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) meets to officially decide on the month that an economic expansion has ended, the six economists usually sit down to a meal.

The "rookie member" of this committee, Princeton University economist Ben Bernanke does not expect to get that "free French dinner" anytime soon.

While the economic data is "quite ambiguous," Professor Bernanke sees no "screaming" evidence of a recession today.

Most economists agree. In fact, they expect the economy to recover from its current slowdown in a few months. But if the slump should deepen to the point where national output actually shrinks for a while, it would end the record 10-year-old expansion and Bernanke would get his meal.

Another member of the Dating Committee, Jeffrey Frankel, a Harvard University professor, notes that the statistics available so far on gross domestic product (GDP), the nation's output of goods and services, indicate a slowdown, but not a recession.

The difference between a slowdown and a recession is a matter of degree. In both cases, unemployment rises, output falls. But a recession is worse.

GDP grew at a 1 percent annual rate in the last quarter of 2000 and 1.2 percent in the first quarter of this year. Perhaps output slumped further in the April-June quarter. But a serious downturn must last longer than one quarter to qualify as an official recession.

On June 18, Robert Hall, chairman of the Dating Committee, put out a memo noting, "The data normally considered by the committee indicate the possibility that a recession began recently, but the economy has not declined nearly enough to merit a meeting of the committee or the determination of a peak date [for the expansion]."

Mr. Frankel, who worked as an economist for the Clinton Administration, sees it as "equally likely" that the economy has merely slowed its pace from the rapid and "unsustainable" 4.5 percent growth rate during the last term of President Clinton.

"We got spoiled," he says. Now the economy is reverting to "more normal numbers."

The consensus found in a recent survey of 54 economists by The Wall Street Journal, sees recovery at a modest pace - 1.6 percent in the present quarter, 2.7 percent in the fourth.

A few economists are gloomier. For example, Dr. Edward Learner, director of the University of California, Los Angeles, Anderson Forecast, sees an 80 percent chance of recession by the first quarter of 2002. "Sluggish growth" the rest of this year and "negative growth" the first half of next year, he says.

The Dating Committee proclaims the end of a cycle only after at least six months of statistical data makes clear that the economy has switched gears.

For instance, the Cambridge, Mass.-based NBER announced that the previous economic expansion peaked in July 1990, only nine months afterward. The date for the end of that recession, March 1991, was also chosen nine months afterward.

So if a recession has started, Bernanke and Frankel won't break bread together until at least next spring. If the expansion has instead reignited, it could be years from now.

Cheery economists are encouraged by the Federal Reserve's 2.75-percentage-point cuts in interest rates this year. They figure this action should step up the economic pace by later this summer or fall.

Asha Bangalore, an economist with Northern Trust Co. in Chicago, puts great weight on the growth in the nation's money supply. One measure, real M2, has been growing recently above 5 percent. The increased money supply should be "adequate" to provide economic growth at a 3 percent annual rate in the second half of 2001.

Ms. Bangalore holds that the Fed has done enough and doesn't need to cut rates further. Otherwise, it might worsen inflation.

Contrariwise, Bruce Steinberg, chief economist at Merrill Lynch, the giant brokerage firm, was disappointed that the Fed cut interest rates only 0.25 percentage points, rather than 0.5 percentage points, at its meeting June 27.

The Fed is not over-stimulating the economy, Mr. Steinberg argues. It has more room for cuts if needed. "We don't see any inflation risk during 2001-2002," he says.

One help for the economy: federal tax rebates, which will add about 10 percentage points to after-tax income growth this quarter, Steinberg figures. So consumer spending could pick up "by Labor Day and certainly by the fourth quarter."

Another bit of good news is that energy prices have dropped sharply. "Things are looking up," notes Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, a Chicago brokerage.

(c) Copyright 2001. The Christian Science Monitor

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