"risks of a runaway decline"

[Louis Proyect <lnp3@xxxxxxxxx>]

Ft.com

US recession fears fanned by confidence data
By Peronet Despeignes in Washington
Published: February 27 2001 15:40GMT | Last Updated: February 27 2001 21:37GMT

Reports of eroding home sales and factory orders as well as of weakening
faith in the US economy fuelled fears that the run of uninterrupted growth
in the US economy may not survive its tenth year.

The Conference Board, a New York business research group, said its consumer
confidence index fell sharply for the fifth consecutive month to a
four-year low of 106.8 in February, on growing anxiety over future
employment conditions.

Alan Greenspan, Federal Reserve chairman, has called confidence a
"critical" factor in averting a recession. Over the past year, the index
has lost more ground than in the year preceding the 1990-91 recession.

Lynn Franco, a Board official, said for the first time since the index
began its sharp descent from 30-year highs that "a severe economic
downturn" may lie ahead. But she said a component measuring consumers'
appraisal of current conditions suggested "we are still undergoing moderate
growth and not a recession."

Meanwhile, the Commerce department said new home sales plunged 10.9 per
cent in January, the steepest monthly drop in more than five years. There
were declines across the country, but they were pronounced in the west and
northeast.

The department also said orders to manufacturers of durable goods - items
such as cars and TV sets built to last more than three years - fell 6 per
cent to $12.9bn in January after a 1.2 per cent gain in December. Shipments
and the backlog of unfilled orders also shrank. A plunge in demand for
aircraft led to a big drop in orders of non-defence capital goods, a proxy
for business investment.

The reports added fuel to growing expectations that the Federal Reserve's
policy-making open market committee will cut short-term interest rates
before its scheduled meeting on March 20, in a bid to arrest risks of a
runaway decline.

The fed funds futures market priced in greater odds of a half-point
reduction in the federal funds rate by the end of March. However, recent
reports of a sharp pick-up in wholesale and retail price rises have stoked
concerns about inflation.

Inflation hawks fear sharp interest-rate cuts could exacerbate inflation
and other imbalances in the economy, worsening any future economic downturn.

But financial markets have supplied no clear signs of inflation prospects.
While the yeild curve - the spread between yields on long-term and
short-term securities - has steepened, the spread between 10-year Treasury
bonds and inflation-protected bonds (TIPS) and guages like gold prices,
commodity indexes and the US dollar have not clearly signalled higher
inflation ahead.

Many analysts have concluded monetary policy remains unnecessarily tight.

The last declared recession ended in March 1991. Assuming growth persisted
this quarter, next month would mark the tenth year of uninterrupted growth
in the US. But the resumed downtrend in US equity prices and the ongoing
litany of bearish corporate and economic reports may lead some to wonder
whether next month's invocation will be "Happy Birthday" or "Rest In Peace".


Louis Proyect
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