New Signs of Weakness Show Risk of Resuming Recession

From The New York Times:

By KENNETH N. GILPIN

A fresh batch of data released today showed further weakness in the American economy, and analysts said the reports did little to dispel the notion that the economy is in serious jeopardy of tipping back into recession.

The numbers, which included a report showing that consumer confidence has fallen this month to its lowest level in more than 10 years, are a reflection of the head winds created by the Iraqi crisis and soaring energy bills.

Continued.

"At best, the economy is flat," said Mark M. Zandi, chief economist at Economy.com, a research firm in West Chester, Pa.

"I think it contracted in February and it looks like it contracted in March," he said. "Another couple or three months and you are in recession."

The statistics released today provided a leading, coincident and lagging look at the economy.

The University of Michigan's consumer sentiment index, the leading indicator, unexpectedly fell to a reading of 75 in mid-March, down from 79.9 in February. As measured by the Michigan survey, confidence has declined every month this year and consumer demand is beginning to wane.

Meanwhile, the Federal Reserve said that industrial production, the coincident indicator, edged up 0.1 percent in February. The number was a bit stronger than expected. But the gain was almost entirely a result of rising output at the nation's utilities, which were in overdrive last month to combat frigid winter weather. Manufacturing output fell 0.1 percent.

Business inventories, the lagging indicator, rose 0.2 percent in January. But much of the increase was a result of an unwanted increase in automobiles on dealer lots. Excluding the increase in auto inventories, businesses pared stocks in January, suggesting that inventory accumulation in the first quarter is slowing sharply from the fourth quarter.

And the Labor Department said that prices at the producer level rose by 1 percent in February. But the gain was almost entirely caused by higher energy prices. Excluding food and energy prices, the so-called core producer price index fell 0.5 percent. Costs fell for cars, computers and clothing.

"In this environment, energy shocks are not inflationary, but either disinflationary or deflationary," said Richard Berner, chief United States economist at Morgan Stanley.

"If they are a tax on growth, it is probably more the latter," he said. "The economy has been pushed to the brink of recession. And it would not take much more to push it into negative territory."

Economists said the American economy faced growing risks as long as uncertainty about the possibility of war against Iraq dragged out.

"The longer the negative fall-out from the political situation lasts, the more it will pervade the economy and erode the positive underlying fundamentals we think we have," said Carol Stone, deputy chief economist at Nomura Securities International.

Allen Sinai, chief global economist at Decision Economics Inc., said: "No one should run foreign policy based on what it may or may not do to the economy. Those are separate issues.

"But there is no doubt that geopolitical risk is substantially damaging the economy. This run-up to war is taking a very significant toll on the equity markets, on the dollar and on the economy."

By mid-afternoon in New York, stock prices were narrowly mixed following Thursday's sharp rally.

Ms. Stone and others said they did not expect the recent spate of weak reports would prompt policymakers at the Federal Reserve to cut short-term interest rates at a meeting next week.

But most analysts seem to expect that at the end of its meeting the Fed will say it stands ready to lower its target on the overnight federal funds rate at any time.

A number of analysts now expect the Fed will need to do much more to shore up the economy. After the release of today's data, Ethan Harris, chief U.S. economist at Lehman Brothers, said he expected the Fed to lower the federal funds rate, currently at 1.25 percent, to a historic low of 0.5 percent by May.

http://www.nytimes.com/2003/03/14/business/14CND-ECON.html

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