Sunday, January 14, 2001
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Posted on: Sunday, January 14, 2001

Probability of recession disputed among experts

USA Today

Recession talk is picking up steam on Wall Street for the first time in a decade as signs of a slowing economy mount. But opinion is split on whether the economy is going down the tubes or will continue to grow, but more slowly.

The gloomiest forecast is by Stephen Roach, chief economist at Morgan Stanley Dean Witter. He revised his already-bearish outlook last week, declaring that the U.S. economy is in recession now.

"The contraction is now in its early stages," Roach said. He expects the economy to shrink at an annual rate of 1.25 percent in each of the first two quarters vs. an earlier forecast of 1 percent growth in the first half of the year. Roach blames the downturn on eroding consumer confidence, sky-high energy prices, tight credit and a weak stock market.

But, for now, Roach’s bearish call is a minority opinion on Wall Street.

While the sharp deceleration in economic growth makes it feel like a recession, it is premature to assume the U.S. economy will grind to a halt, other top Wall Street economists say. They say there still is only a 30 to 35 percent chance that the economy will fall into recession, broadly defined as two consecutive quarters of economic contraction.

Merrill Lynch chief economist Bruce Steinberg sent out a note to clients rebutting Roach’s claim.

"We don’t believe that the U.S. economy is in or is about to be in a recession," he said. "There are risks, but we aren’t going down the tubes."

Economists at Lehman Bros., Credit Suisse First Boston and J.P. Morgan also say it’s unlikely the economy will shrink.

Much of the optimism is based on the belief that the Federal Reserve — which slashed short-term interest rates by half a percentage point earlier this month — will cut rates an additional percentage point by midyear.

But that’s not to say Wall Street economists haven’t been trimming estimates. Credit Suisse First Boston revised its first-quarter growth last week to zero and second-quarter growth to 1 percent, down from 2 percent.

Goldman Sachs, Merrill and Lehman all lowered their growth forecasts.

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